For the next two to three years, certain oil/natural gas pricing relationships are “likely” to be ongoing themes, energy analyst Stephen Smith noted in his latest monthly report. And, except for extreme cold winter shortfalls, “we don’t expect to see sustained periods when Henry Hub gas prices exceed Gulf Coast distillate prices.”

With $31-32 West Texas Intermediate crude prices and normal weather for the next three months, “odds now favor normal-to-100 Bcf below-normal storage by mid-May,” Smith said. He projects a target Henry Hub cash price range of $4.75-5.25/MMBtu for mid-May.

The analyst noted that the higher competitive oil prices and “demonstrated lack of domestic and Canadian surge producing capacity” in cold weather are factors that strengthen the gas price outlook fundamentally — with a “likely multi-year seasonal impact for Canadian imports, and a possible multi-year impact related to higher oil prices.”

The gas storage surplus has now vanished, and average weekly gas prices have declined for the past month — from around $6.07 to $5.30 — proving once again that gas prices rise on cold weather expectations and fall when the cold weather arrives, said Smith. “The recent easing of prices appears to be an acknowledgement that the worst of winter is over and that, despite the very cold January and first half of February, storage is close to normal levels.”

For the rest of 2004, Smith is forecasting Henry Hub gas prices of $5.10 for the second quarter, $5.10 for the third quarter and $5.30 for the fourth quarter.

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