Although gas prices are nearly $2/MMBtu lower than they were in early June and show no signs of substantially reversing course, ever-bullish analysts at Raymond James & Associates devoted their “Stat of the Week” outlook to making a case for a significant rebound in the August natural gas market. Others experts, however, aren’t buying it.

“The reduced incentive to burn oil products, combined with the potential for warmer weather, leads us to believe the U.S. gas markets may be surprised by a sharp increase in gas demand as we move through August,” said Raymond James gas analyst Wayne Andrews.

“Recently the large storage injections and pullback in the price of natural gas have given several naysayers fuel to add to their bearish case, currently declaring 2003 to be a replay of 2001. Simply put — we disagree.”

Andrews said gas-fired electric generation capacity will be the key to the market going forward this summer. A substantial amount of gas-fired capacity has remained idled because of more favorable oil-fired generation due to lower competing fuel prices.

“However, we expect many of these idled gas-fired units to start up as the recent pullback in gas prices has shifted the gas-to-oil ratio in favor of burning gas,” he said.

Furthermore, Andrews said current spark spreads indicate that lower-efficiency idled gas-fired plants also are close to restarting, which will help put a floor under gas prices.

Consultant Stephen Smith agrees, but only to an extent. In his Monthly Energy Outlook released Monday, Smith said he believes that gas demand has increased as prices have fallen. “Some price-induced recovery of ‘swing’ industrial/utility demand was evident in the storage build for the week ending July 18,” he said. “This process should continue or accelerate in the coming weeks, and there will be some additional help from a seasonal-or-better mid-summer-forward hydropower decline.”

However, Smith added that it is “still possible to see some further downward pressure on price, particularly in the event of milder-than-normal weather.” Gas storage levels are fast approaching historical averages, which will continue adding downward pressure on prices. But the increase in demand as prices fall should draw gas away from injections in the coming weeks, Smith noted. He said the “basic process” in the market over the next few weeks “should be one of forming a price bottom.”

Several gas futures analysts aren’t quite ready to advise their clients to initiate short positions in the futures market. Kyle Cooper, futures analysts with CitiGroup, said it is “quite likely” that storage injections will exceed the five-year average for the rest of the season, leaving working gas levels in storage at a very comfortable 2,988 Bcf on Nov. 1.

“Although prices have already experienced a very significant drop, until [storage] injection patterns change, prices are still considered vulnerable to continued weakness,” he said.

Cynthia Kase of Kase & Co. also said the “primary scenario continues to call for a bearish environment,” but she added that “a correction could take place at any time.” She said the “lower the correction, the more bearish the follow through expected,” meaning if prices rebound but only make it to $5.15, prices could come crashing back down to even lower levels than are seen currently, with a high probability that they would reach $4.00.

©Copyright 2003 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.