Two "bullish surprises" arrived this fall: a bit colder than expected temperatures and an "extremely" low level of liquefied natural gas (LNG) imports, which together suggests that Henry Hub prices in early 2008 may inch higher than a year ago.

An analysis by Natchez, MS-based Stephen Smith Energy Associates assumes "roughly normal" heating degree days (HDD) through December and 5% lower-than-normal HDDs from Dec. 7 through April 4. Under this scenario, the April 4 storage surplus would be about 150 Bcf lower than last year's surplus for the corresponding date. The estimated lower storage trajectory, plus likely higher crude prices, "suggest that Henry Hub prices for the coming first quarter should be higher than last year's," the company said.

North American gas prices are not "perfectly linked" with oil prices, but they are partially linked in different ways, said the Smith analysts. "The degree of linkage will be increasing as LNG constitutes an ever-larger percentage of total North American supply."

However, LNG prices in Asian and European markets are "more strongly linked to crude oil prices," and as a result "a higher oil price tends to 'pull' more LNG to Asian and European markets. In addition, after one of the milder winters in the last half century, Europe is expected to be only slightly milder-than-normal this winter. Japan will have 8,000 MW of nuclear capacity down for most of the winter, and LNG is the main backup."

Based on weather forecasts and the outlook for tighter LNG imports, Smith's "base case" price outlook for January bidweek assumes $85-100 West Texas Intermediate oil prices through year's end, private weather service projections, and 95% of HDD norms through April 4 -- which would lead to a projected storage surplus of about 580 Bcf on Dec. 28, or 260 Bcf below the surplus of one year ago.

"In this environment, we estimate a late December gas-to-resid spread in the range of minus $2.50/MMBtu to minus $1.50/MMBtu." Assuming a resid price of $11/MMBtu for late December, the Smith team said a likely January Henry Hub bidweek price would average in the $8.50-9.50/MMBtu range.

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