Is the glass half empty or half full? One energy consultant last week said the end-of-year natural gas price outlook improved "considerably" over the past month following several "hot" weeks, and the falling gas storage levels combined with high fuel oil prices will offer a higher "price umbrella" for gas. Another well-known gas price prognosticator said a weather-driven surge may raise prices toward year's end but advised investors to stick with an oil-weighted strategy .
On the half-full side, Natchez, MS-based Stephen Smith & Associates raised its natural gas price forecast for 4Q2007 by 55 cents to $7.30/MMBtu (Henry Hub) from an earlier estimate of $6.75 on of the expectation for lower gas storage numbers. The odds, said Smith analysts, favor heating degree days (HDD) in 4Q2007 to be higher than a year ago based on the National Weather Service (NWS) and other weather outlooks. The team raised its full-year 2007 gas price to $6.95/MMBtu from $6.80. For 2008, the price forecast was hiked to $6.95/MMBtu from $6.75.
Smith's forecast came on the heels of the latest Energy Information Administration (EIA) storage data, which indicated that 74 Bcf was injected into storage, matching the five-year average for the week and slightly below last year's 79 Bcf injection (see Daily GPI, Sept. 28). As of Sept. 21, working gas in storage stood at 3,206 Bcf, according to EIA estimates. Stocks are 37 Bcf less than last year at this time and 238 Bcf above the five-year average of 2,968 Bcf. For the week, the East region injected 44 Bcf, while the Producing and West regions chipped in 20 Bcf and 10 Bcf, respectively.
"The primary driver for this eight-week surplus reduction, as might be expected, was a sequence of unusually hot weather as compared with last year," or 557 total cooling degree days (CDD) for the last eight weeks versus 488 total CDDs for the corresponding period of last year), the analysts said. For the period from Oct. 5 through Jan. 4, 2008, they used a forecast of 7% lower than normal HDDs to drive their storage projection. The NWS, they noted, expects a warm fall. "Last year had 13% lower HDDs for the corresponding period..." and the data indicate "an early January 2008 storage projection, which is 300 Bcf lower than one year earlier."
The team assumes that in 4Q2007, HDDs will be 7% below 10-year norms, compared with 4Q2006's HDDs, which were 13% below 10-year norms. Also, the current price for New York Harbor (NYH) 1% sulfur residual fuel oil was standing at more than $9/MMBtu, compared with an average price of $6.43/MMBtu in 4Q2006.
"Our 'base case' price outlook for November bidweek outlook...assumes an environment of $75-85 WTI [West Texas Intermediate] for the next month or two, private weather service projections of CDDs through Oct. 5, 93% of HDD norms for Oct. 6-Nov. 2, and no major hurricane disruptions to gas supply through hurricane season," analysts stated in a report.
In their assumptions, the analysts estimate a late October gas-to-resid spread in the range of minus $2.00/MMBtu to minus $1.00/MMBtu. At an assumed NYH 1% resid price of $8.75/MMBtu (up 25 cents/MMBtu from two weeks ago) for late October, Smith analysts implied "a likely" November Henry Hub bidweek price range of $6.75-7.75/MMBtu.
On the half-empty side, Raymond James & Associates Inc. said that with the expectation of falling gas prices and closer alignment of the New York Mercantile Exchange (Nymex) strip with the spot market, investors should pursue an oil-focused strategy. Last month Raymond James cut its 2008 gas price forecast to $7/Mcf from $10/Mcf (see NGI, Sept. 24). The firm said next year will mark the first negative growth year in terms of activity and pricing in more than five years.
"[W]e would suggest trading the gassy names on a short-term basis around moves in natural gas prices (i.e., the potential winter spike between now and January). From a longer-term perspective, we would invest in those energy companies that have meaningful exposure to oil-driven themes. That would include primarily companies leveraged to deepwater and international markets," the firm said in a research note last week.
While a weather-driven gas price surge is possible with winter's onset, Raymond James said it expects prices to fall through the spring and late summer next year. "More importantly for energy investors, we think next year's decline in natural gas prices will be accompanied by a corresponding decline in the gas futures' strip.'"
The Nymex strip drives drilling activity more than spot prices, the firm said, and futures prices were high over the last two years relative to spot prices. "Next year, we expect that the fear of surging LNG (liquefied natural gas) imports and stubbornly high U.S. gas production will force futures pricing closer to spot pricing," Raymond James said.
For 2008, the firm said it expects the Nymex strip to average "well below $7/Mcf, thereby driving U.S. drilling activity lower." The firm also noted that it is cutting its earnings outlook for many drilling and oilfield service companies with "meaningful" North American exposure. But investors shouldn't panic.
"While we now see activity and pricing levels headed lower over the next year, we are not expecting a drilling activity meltdown such as those that occurred during the downturns in 1998/1999 and 2001/2002," the firm said.
Looking north to Canada, Raymond James said things can't get much worse than they have been. "After an abysmal year so far in Canada, which has witnessed a rig count decline of more than 30% year-to-date, we do not expect much additional downside to come in terms of activity levels for next year."
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