With weather forecasts producing bearish news at every turn andnational storage reserves looming ever larger, Raymond James &ampAssociates recently published a report projecting spot wellhead gasprices will drop below the $1.50/Mcf level before the beginning ofsummer. The study, however, also warns of a gas “price shock” inearly 2000, when gas shortages run rampant and production is unableto keep up because of sharp declines in exploration and productionspending. It seems the industry is in store for a spot marketroller coaster ride.

The report says the next few months look bleak. “Unfortunately,if we end up [this] heating season with 1.4 Tcf of gas in storageand U.S. production does not decline substantially, then typicalinjection levels would drive gas storage in October into the 3.5Tcf range. The only problem with this calculation is that there isonly about 3.1 to 3.2 Tcf of available storage [space]. Thissupply/demand model suggests that U.S. natural gas prices could bepushed below $1.50/Mcf, as [the heating season ends] and excess[stored] gas floods the spot market.” The study calculatestemperatures have been 10.39% warmer than normal so far this year.The overall heating season is expected to be 9% warmer than normal.

Along with the foreboding short-term projection, the study alsoindicates the industry is in for quite a surprise over thelong-term. “Unfortunately we believe the supply side of theequation is getting ready to head downward.”

The study points out that when the criteria is adjusted forthese abnormal temperatures, “real” underlying demand has grown1-3% over the past three years. Assuming a normal 1999/2000 winter,the study projects an 8% increase in gas consumption for theheating period. This increase, combined with a flat to smalldecrease in production, will cause a price spike.

“I think it will be similar to the shortages experienced in the1995/96 winter,” said J Marshall Adkins, a Raymond James &ampAssociates spokesman. “Is the Henry Hub going to average doubledigits? No. But many spots will see spikes to the $5.00/Mcf range.”

Confirming the down-before-up projection of Raymond James &ampAssociates is a separate study released by the Energy InformationAdministration (EIA). In its Short-Term Energy Outlook, EIA saidspot gas prices will not exceed $2/Mcf until the fourth quarter of1999. But after prices rise above the $2.00 mark, the EIA said, “ona quarterly basis, wellhead prices are not projected to dip below$2.00/Mcf for the entire year” 2000.

PaineWebber, in its research into the spot market, also isexpecting prices to turn around later this year. PaineWebber notedthe U.S. rig count as of Feb. 5 established a new record low as itfell to 558, down 43%, or 416 rigs, from the same time last year.”We expect the impact of increasing natural gas demand anddeclining deliverability to result in higher prices later thisyear.”

John Norris

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