NGI The Weekly Gas Market Report
Will production declines expected to stem from the recent rashof producer spending cuts (see related story) lend support to gasprices this year? Well that’s just one of several questions on theminds of analysts as they speculate on what the market will grantproducers this year. While there’s not a consensus, the generalmood seems to be pessimistic.
“There’s not much holding [gas prices] up,” said Thomas J.Woods, Ziff Energy vice president for U.S. Gas Services. Woods saidZiff has been warning its clients that current prices are notsupportable. “We had put out some early warnings in July whenprices first frayed, and we said that there was a very significantpossibility that this would go [on].”
Ziff doesn’t release its price projections, but Woods concededcompared to its peers, Ziff Energy is “probably a lot moreconservative about gas prices.” Woods said he doesn’t think theNymex will average more than $2.00 for 1999, and it could benoticeably lower.
He noted in the aggregate, gas sales have been essentially flat.”There’s probably going to be no growth in gas sales for four orfive years on an aggregate basis.” December’s high storage levelssuggest to Woods there is more downward pressure on prices to come.”Sooner or later somebody is going to have to move that storage orsomebody is going to leave that gas in storage and pay thepenalty.”
And there is increasing pressure on processors and producers nowdue to low liquids prices relative to gas prices, noted Woods.Producers, who once were able to pay for processing with liquidsremoved from the gas stream, now are being asked to pony up withprocessing fees.
What remains to be seen, according to Woods, is whether priceswill ease down further or plummet. “The question is what’s themagic witching price for the strip price going out 12 months thatwould really panic people. I would watch the December of 1999[contract] or January or February of 2000. If they can hold eventhough the market is plunging, then you’re going to have a softlanding. But if they start to not be able to hold, then you’regoing to have a hard landing.”
Not so pessimistic is PaineWebber’s Ronald Barone. “We’re stillat $2.40 [composite spot wellhead price] for the year, but we couldbe a bit on the high side because of the surplus gas in storage andthe overhang. I’m not going to cut [the estimate] yet because Ithink it’s a doable number.” Barone said he thinks this summer’sprices will be in the low $2.00 range, noting there will be a lotof gas-fired generation coming on line, “and I think that gas-firedcapacity will push up demand.” Further, recent declines in drillingactivity will begin to take their toll on productive capacity,further tightening supply, he said.
Jefferies & Co. analyst Carl Kirst said his firm will releaselowered price estimates today. Last week, the official Jefferiesprediction was $2.15 for a national average at the wellhead and$2.35 at Henry Hub. “Clearly, we’re reassessing our first quarterand our 1999 outlook. At the same time while you have some riskshere in the first quarter, particularly over the next three to fourweeks, if you have normal weather from here to the end of March,our models are basically putting out we can get to the same storagelevel we had last year.” That is, Jefferies still thinks theindustry can eat through a storage overhang greater than 600 Bcf.
With that Kirst said prices this year could be “a little bitbetter” than last year’s. While he said Friday that today’s revisedestimate would be lower than the previous $2.15, it likely would bestronger than 1998’s $1.95.
Jefferies is expecting storage at the beginning of injectionseason, Nov. 1, to be 150 to 200 Bcf below the same time last year.That’s based on projections for a 2.4% demand increase over lastyear coupled with flat domestic supply, noting a slight increase inimports from the Northern Border expansion. “The wild card is,’gee, do you actually see a decrease year over year in production?’I guess if there is a piece of the puzzle everybody has their eyeon, I think that’s it.” For next August and September, Jefferiespredicts flat demand growth from last year because this summer isnot expected to be a repeat of last year’s scorcher. Noted SusannahHardesty, president of Energy Research & Trading Inc., “With LaNina weakening slightly this summer, expect cool temperatures, wetweather and an active hurricane season.” We’ll see, said Kirst.”Keep in mind the conventional wisdom was La Nina was going tobring a brutally cold winter.”
Gas analyst Ron Denhardt of Burlington, MA-based WEFA Inc. saidhis firm is forecasting $2.02/MMBtu at the Henry Hub for 1999. Thebig market movers in “the coming months are going to be clearlystorage and weather. I guess we were assuming a somewhat warmerthan normal January through March, and we came up with storage[inventory] 450 Bcf ahead of last year [for the first quarter]. Wesee that storage as being a big overhang.” Compounding thesituation in his view are more hydropower due to greater rainfallin the Northwest, growing gas supplies from the Northern Borderexpansion, and low oil prices. Woods said oil already has capturedsignificant amounts of the market in the East.
Price predictions are subject to revision and sometimes littlemore than guesses, and there’s nearly an entire year left to seewhat happens, but “eventually a normal winter has to come theindustry’s way.”
Joe Fisher, Houston
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