A veteran analyst of natural gas fundamentals sees a very tight balance between supply and demand with prices rising to well over $4.00 by February.

A drop in productive capacity caused by a decline in drilling activity has exacerbated the U. S. supply demand balance, and this is in spite of a relatively large stock of working gas in storage that has so far limited, and should continue to curb demand for storage refill for the rest of the injection season, according to Kevin Petak, Director at Energy and Environmental Analysis, Arlington.

“We expect the high working gas levels to result in nearly 3 Bcf/d less storage refill for the remainder of this injection season versus last year’s refill. However, much of the gas that would otherwise go to storage will satisfy growing gas demand in power generation and the industrial sector. Continued construction of new gas-fired power generating capacity, and increased maintenance of nuclear units have contributed to the trend.

In addition, relatively high oil prices will discourage switching from gas to oil, even as gas prices remain relatively high. Growing gas demand will leave little excess gas from supplies,” he said.

The EEA price forecast is extremely bullish. It shows Henry Hub forecasted gas prices of $4.38, $4.70, and $4.14 for January, February, and March 2003. Conversely the Nymex futures recent settlements showed $3.607, $3.587, and $3.555 for the same period.

“A continued rise in drilling activity, which started in May, is crucial to stabilizing gas deliverability and maintaining market integrity. While the rebound in drilling activity to date has not been as we had expected, we believe that current and expected oil and gas prices should encourage a vibrant increase,” Petak said. Given an average winter EEA expects tighter supply/demand and higher prices next year. EEA expects gas supply/demand will continue to remain tight through 2004 as gas-fired power generation continues to increase.

But other traders don’t see prices reaching the levels projected by EEA. “What doesn’t figure in my opinion with a February price of $4.70 at the Henry Hub is that the screen is showing $3.60,” says Jim Ritterbusch of Ritterbusch and Associates. “As far as their estimate of 3.0 to 3.1 TCF for working gas inventories at the beginning of the heating season, that is in agreement with most analysts. A normal winter, however, is just not associated $4.00 natural gas — $3.60 to $3.90 tops is about as high as prices can go with a normal winter,” suggested Ritterbusch.

In the near term both bulls and bears may see tough trading. “I don’t see the natural gas market as able to sustain any rallies. It’s been a listless market for quite a while and stuck in a trading range. Both the bulls and the bears have been frustrated.”

While the market can’t sustain rallies, “there is also not a lot of follow-through to the downside. I think the market can punch through these old lows one more time and perhaps take September down to $2.72 or so, and that would be the lows for the rest of the summer. After that I would be a buyer for the long haul,” Ritterbusch said.

“It’s just one of those markets where you have to force new lows and get the funds loaded to the gills on the short side of the market. There has been a downshift in other economic variables, plus when you are sitting on as much storage as there is; gains are bound to be tempered. The industry is definitely on the low side of natural gas pricing parameters for the next 6 months,” he predicted.

(Republished with permission from Bill Burson, https://gastrader.net )

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