Based on expectations that Rita damage will be minimal and major hurricanes threats have ended for the 2005 season, energy consultant Stephen Smith said he’s betting Henry Hub cash ($15.27 on Sept. 22) will come tumbling down over the next week to 10 days and November futures ($12.687 Friday) will fall by more than $1/MMBtu before expiring in late October. Smith and others are seeing demand destruction about matching shut-ins going forward.
“Once Rita shut-ins are back online, the ongoing daily Katrina effect will continue to reduce supply by about 3 Bcf/d,” Smith noted in his Weekly Gas Outlook. “But our model indicates that this supply reduction will be largely offset by reduced demand effects such as below normal [heating degree days] and various price responses to high gas prices.
“Such a scenario is not without precedent — this is exactly what happened in the aftermath of Hurricane Ivan in the fall of 2004.”
Smith said his gas price outlook is based on a gas-residual fuel oil price spread of $3.00-3.50 for the upcoming November bidweek. Last week’s resid price was $8.13 (1% sulfur NY). “We assume this is $7.75/MMBtu by November bidweek so as to yield a projected Henry Hub bidweek price of $10.75-11.25 (up more than 75 cents from last week’s estimate on new knowledge of shut-in losses from Rita plus more news on the extended duration of Katrina-related processing plant recoveries.”
J. Marshall Adkins, an analyst at Raymond James & Associates, said the loss of demand from the Texas chemical industry (2.5 Bcf/d) and the power outages in the short term will help offset the production shuts-ins from Rita and Katrina. “In all we might see gas demand destruction of nearly 3 Bcf/d for a similar timeframe…,” he said in a “Stat of the Week” research note to clients.
“That said, we continue to believe there is a high likelihood that the Gulf of Mexico could see anywhere from 1 to 3 Bcf/d removed from the gas supply stream over the next six months due to Katrina. Additional damage in the central Gulf of Mexico after Rita would only push this number higher,” said Adkins. “We envision a very meaningful and lasting positive impact upon domestic natural gas prices as a result of both of these hurricanes, and we would expect gas prices to remain near — or even above — a 6:1 ratio with oil for the foreseeable future.”
Adkins noted the damage from Rita appears to be “more moderate than had been feared beforehand.” But he predicted the gas supply-demand balance would continue to tighten. “The gas market will likely feel the impacts of the storm for a longer period of time [than the oil market],” he said. “Hopefully, energy shortages and/or rising prices will not create prolonged economic damages.”
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