Spot wellhead prices are expected to lose some of the strengthexhibited earlier this month and average at or below $2/MMBtu forFebruary, according to industry analysts at PaineWebber, andWashington DC-based Energy Security Analysis Inc. (ESAI).

“We just assume the continuation of warmer than normaltemperatures caused by El Nino,” said PaineWebber analyst Ronald J.Barone. He expects a composite national wellhead average of$1.95/MMBtu for March and $1.99/MMBtu for the first quarter, whichcompares with $2.52/MMBtu for 1Q97.

Ditto for ESAI’s analyst Chris Ellsworth. “We’re expecting [spotwellhead] gas prices to come back down again at least to $2 andmaybe even a little bit lower,” he said. That could take place assoon as next week. “The fundamentals point to very soft prices aswe go into the spring [$1.90-$2.00/MMBtu].” But it’s difficult tosay how far cash can fall. The futures market continues to findsupport at $2, he noted.

Barone and Ellsworth have different views on why the cash andfutures markets have found support recently despite weakfundamentals. Barone believes it’s partly because of an underlyingtight supply-demand balance. “.[I]f we didn’t have warmer thannormal weather conditions then we would be looking at gas pricessomewhat between $2.50 to $3.00,” he said. “New production from thedeeper waters is not offsetting the decline of deliverability fromshallow waters,” he said. In addition, Canada cannot export anymoregas simply because of pipeline constraints. “We estimate we’recapable of producing about 53.5 Bcf/d. Back in the late 1980s wewere capable of producing about 56 Bcf/d, and I’m not so sure that53.5 is going to be able to go up much in the next few years.”

A recent short-term overview by Arlington-based Energy VenturesAnalysis Inc. agrees, saying that there are signs of declines inproduction levels in certain regions, despite overall higherdrilling levels. These regions include the shallow waters of theGulf, Oklahoma and Kansas. “On balance, it appears that tightsupply and demand conditions will exist for most of 1998 and 1999,particularly after the 1998 storage injection season starts,” thereport said. The report added that because of the underlying tightsupply and demand conditions, prices have been volatile.

ESAI’s Ellsworth attributed the recent support mainly tospeculators stepping in and pushing prices up. “In terms offundamentals, there’s nothing that should be holding prices up thathigh,” he noted. “What I think has been going on, especially withthose two storms that we had last week on both coasts, [is]speculators, or the non-commercials, have been getting into themarket perhaps believing there still may be a remnant of winterleft and that prices are going to their more seasonal levels inFebruary.” He also noted the strong storms, even though mild intemperature, could be partly behind the market reaction because thepotential for disruptions in deliveries did exist.

The Energy Ventures report also lends support to the role oftechnical factors in affecting price fluctuations. The reportdescribed the rise of $1/MMBtu in a shoulder month, such as lastSeptember and October, and the recent price strength despite thelack of fundamentals as unprecedented and largely due to thesetechnical factors.

Firas Barazi

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