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Raymond James Cuts '05 Price Forecast; Stephen Smith Sees Equilibrium at $6/MMBtu

Ever-bullish analysts at Raymond James & Associates were forced to admit last week that their gas price forecast for 2005 appears excessive in light of the current gas storage surplus. However, that didn't stop them from raising their price forecasts for 2006 and 2007 far beyond what some other experts are predicting.

Raymond James analyst J. Marshall Adkins cut his Henry Hub gas price forecast for 2005 to $6.80 from $7.25 "based on unfavorable weather." The Raymond James forecast is still 80 cents/MMBtu more than Wall Street consensus estimates.

"We are cognizant...that weather is and has been a major driver of gas prices on a near-term basis," Adkins said in his energy Stat of the Week. "We are lowering our 2005 gas forecast to reflect the fact that abnormal weather has knocked out a substantial amount of gas demand during the past nine months.

"Normally we would expected an average oil/gas price ratio of 5.5:1, or at least 6:1, but given the larger-than-expected current gas storage volumes due to the very mild 2004-05 winter (as well as the mild 2004 summer), this ratio may not materialize until the second half of 2005."

Adkins predicts the current storage surplus, which is about 26% higher than the five-year average, will vanish and the tight supply-demand situation will return by 2006. "We continue to emphasize that the underlying, nonweather driven fundamentals for natural gas remain extremely bullish," he said. "We believe that the sentiment in the gas market will improve over the coming months as year-over-year weather comparisons become more favorable and surplus gas currently available shrinks as a result of declines in supply."

He also raised his price forecast for next year by $1 to $7.50, which is much higher than other market predictions. For example, it overshoots current futures prices by 80 cents/MMBtu and is nearly $2/MMBtu more than the forecast of Stephen Smith Energy Associates.

Smith is expecting Henry Hub gas prices over the next three quarters to average $5.60/MMBtu, $5.75 and $6.40, followed by an average of $5.60 next year.

The first quarter of 2005 ended with Henry Hub prices averaging $6.27, a far cry from the $9 and $10/MMBtu prices that the futures market had indicated last November, Smith noted in his Monthly Energy Outlook. That "reminds us that visions of winter gas prices routinely tend to overshoot the mark.

"The gas price environment of early 2005 is basically unchanged from the one we have experienced for the last fifteen month," Smith said. He noted that the crude oil situation is basically unchanged. Meanwhile the "North American gas production decline of the last few years has now essentially vanished and North American production for the next year or two should be expected to remain basically flat.

"The first significant expansions of LNG import capacity will not occur until 2006. In this environment, the historical $6 center point price of the last 15 months would appear to be the best equilibrium price estimate for the year ahead," he said.

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