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Raymond James: Gas Fundamentals Remain 'Extremely Bullish'

The underlying fundamentals for natural gas prices -- minus any weather-driven problems -- remain extremely bullish, and sentiment in the gas market will improve over the coming months, according to a new report by Raymond James. Its current 2005 gas price forecast is $6.80/Mcf, with 2006 and long-term gas forecasts at $7.50/Mcf.

Analysts said they expect to see favorable year-over-year weather comparisons in the next few months, along with a shrinking supply of surplus gas.

"We are cognizant, however, that weather is a major driver of gas prices on a near-term basis," said analysts. "Our 2005 gas forecast reflects the fact that weather has simply not cooperated this winter season. Normally, we would expect 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 2004/2005 winter (as well as the mild 2004 summer), this ratio may not materialize in 2005." Raymond James' estimate for oil prices in 2005 is $46.50/bbl.

The report noted that assuming BTU parity of 6:1 and Raymond James' 2005 oil forecast, fair value for gas in 2005 "should be between $7.50 and $8.00. However, taking the weather factor into account, we are taking a more conservative approach and assuming that a 7:1 ratio will hold for the second quarter and then gradually return to roughly a 6:1 ratio by the end of the year."

"We would point out that surges in gas prices are entirely possible over the next 12 months, depending on the weather. Indeed, if gas were to trade in parity with heating oil, it could easily spike to $8 or higher. Again, even though our current 2005 forecast is more than 40 cents (or 6%) above Street consensus, it is actually below current futures pricing."

Over the long term, the analysts said that their 6.25:1 parity assumption "will prove to be conservative, as the natural gas to crude oil price ratio should be closer to 5.5:1, reflecting the higher costs associated with consuming heating oil equivalents." The assumption "could easily be achieved" if there is a warm summer or a normal to colder-than-normal winter.

"The bottom line remains simple: The combination of falling domestic gas supply, a strong U.S. economy, and favorable fuel-switching ratios will most likely eventually result in natural gas prices trading at or near BTU parity with petroleum liquids."

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