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Bearish Fundamentals of Mild Weather, Rising Production, Conservation Hit Market

With bearish fundamentals finally in the driver's seat of the gas market once again, futures prices have plummeted to about $9.50 from a peak of $15.78 on Dec. 13, 2005, and analysts are dropping their forecasts for 2006. Arlington, VA-based Energy and Environmental Analysis Inc. (EEA) now predicts Henry Hub prices will be back to $6.45 by April and eventually will hit $5.50 by October when all the shut-in Gulf gas production has returned.

EEA analyst Geoffrey Brand noted that the Gulf of Mexico recovery process has gone better than expected in recent weeks with offshore shut-ins now totaling about 1.88 Bcf/d, according to the Minerals Management Service. "We are expecting only 500 MMcf/d of Gulf production will be shut in by summer and full recovery by next fall," Brand said in an interview with NGI. He said that includes shut-ins both onshore and offshore. "Last November we were expecting about twice that amount would remain shut in through the winter."

EEA is now predicting that Henry Hub prices will average about $7.50/MMBtu in 2006 and $7.40 in 2007. U.S. production is expected to steadily increase through 2007. Production is projected to rise to 50.7 Bcf/d in 2006 and 51.9 Bcf/d in 2007 from about 49.9 Bcf/d in 2005, EEA said in its Monthly Gas Update for December.

"The big thing is not really [weaker] demand, it's mostly supply growth," said Brand. "The two major factors that have driven the price down are the hurricane production recovery, which is going a little faster now, and the lower oil prices. Natural gas and oil prices are connected and oil prices are easing."

Rusty Braziel of Denver-based Bentek Energy agreed that the production recovery has quickened but he also said the supply response to record winter gas prices has been a major contributor.

"Every producer in this country who ever thought about punching an extra hole or putting in additional compression or anything that they can in their fields to get more gas out had better ought to be doing it as much as they possibly can," said Braziel. "In East Texas we have an expression that says, 'You make hay while the sun is shining.' That's what's going on here."

Porter Bennett, Bentek's founder and CEO, said U.S. gas production (including Alaska) in 2005 will be down about 0.4% because of the hurricane damage and 600 Bcf of lost supply. Without the hurricanes, however, production would have grown about 1.7%, he said. With prices where they've been, that growth trend will continue. "Increased drilling activity over the past 18 months appears to have resulted in significant production gains in most U.S. continental production basins," said Bennett.

"We're seeing growth in East Texas, Fort Worth, Texas Gulf, Uinta/Piceance Basin. As long as you have the exploration activity like we have right now there's no reason why [this production growth] won't continue."

According to Bentek's data, which is gathered from pipeline companies and supplemented with state wellhead data, production volume in the Anadarko, Arkla, Arkoma, East Texas, Fort Worth, Green River/Overthrust, Texas Gulf Coast, Uinta-Piceance and Wind River basins increased an average of 8.4% in 2005 compared to 2004.

However, most of the impact on prices during the last week mainly came from the warmer weather. The 1 Bcf injection reported by EIA for the week ending Dec. 30 was mainly a result of above normal temperatures, Braziel said. But he also said the part of the equation not related to weather was 75% higher production and 25% conservation and demand destruction. Bentek's early forecast for the next weekly storage report indicates that there will be another injection in the Producing region, no change in the West and about a 19 Bcf withdrawal in the East.

"I don't think that we're going to have a [net] injection, but my goodness even if it's a [0-30 Bcf withdrawal] those seem to be historically low numbers for this time of year," said Jim Simpson, vice president of operations at Bentek. "There is nothing right now that would indicate that we are going to have a withdrawal greater than 30 Bcf."

The weather is likely to continue pressuring the market lower, noted Jon Sorenson, a partner at Competitive Energy LLC, which manages energy purchases for about 20,000 power, gas and oil customers in New England, Atlantic Canada and Texas. "As long as the mild weather holds -- and it's supposed to be 40 degrees on Monday here in Boston -- we expect prices to [continue lower]," said Sorenson. "If you go out to Jan. 13, the weather is predicted at 43 degrees for a high in Boston. You're running five to 10 degrees above average right now.

"We have some very significant fundamentals going on now that are dwarfing the technicals finally after 18 months of technicals driving the market," he said. "The facts are that most of the Gulf infrastructure will be back on line between March and June, and number two, the weather is cooperating.

"I can comfortably say that I see believe we'll see $7 gas [Henry Hub] in March or April. We have to. I'm not ready to jump on the $5 bandwagon yet. Maybe in 2008 when more LNG comes in. But I think $7 is very doable."

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