The trends that have driven the recent rise in natural gas prices could reverse course going into spring, energy analysts with Raymond James & Associates Inc. said last week.

In their weekly update, the Raymond James analysts cut their full-year 2008 gas price forecast by 50 cents to $6.50/Mcf because of what they see as high storage levels at the end of the heating season (see NGI, Jan. 14). Raymond James' J. Marshall Adkins and James M. Rollyson said they had expected a "near-term pop" in gas prices going into mid-January because of the early winter weather comparisons from a year ago, but they don't expect the higher prices to last.

"Thanks to some cooperation from the weather, we easily surpassed last year's withdrawals and, in the process, have opened up a healthy deficit in natural gas storage," they wrote. "This has helped drive nearly a 20% move in natural gas prices to around $8.25/Mcf." However, "winter is half over. Unfortunately, so too are the easy comparisons for weather and, therefore, modest gas storage withdrawals. From here on out, those comparisons get much more difficult in the face of what was 10% colder-than-normal weather during the last half of the 2006/2007 winter."

Adkins and Rollyson are forecasting a drop in gas prices as spring arrives. "Based on normal weather from here on out, we expect the current 282 Bcf deficit to turn into a surplus of 275 Bcf by the end of withdrawal season."

In another report, energy analyst Stephen Smith remained somewhat bullish on winter weather. His team of forecasters had predicted a storage draw of 56 Bcf for the week ending Jan. 11, with storage projected to fall from 2,750 Bcf to 2,694 Bcf. (The Energy Information Administration Thursday reported a 59 Bcf withdrawal for the week ended Jan. 11 (see Daily GPI, Jan. 18)). Smith said the forecast compared with a "normal" seasonal pull of 147 Bcf, based on 1994-2004 norms.

"The net effect is a 91 Bcf increase in the storage surplus versus 10-year norms, to 634 Bcf (versus a surplus of 898 Bcf one year ago)," Smith wrote. However, the two weeks ending Jan. 25 "are expected to average 5% colder-than-normal HDDs [heating degree days]. This should reverse either all or at least a large share of the 91 Bcf surplus increase of the past week."

Assuming West Texas Intermediate oil prices of $80-100/bbl, private weather service projections of HDDs through Jan. 25 and 98% of HDD norms through April 4, Smith said the projected storage surplus would be about 514 Bcf in late February.

"In this environment, we estimate a late February gas-to-resid spread in the range of minus $3.75/MMBtu to minus $2.75/MMBtu," Smith wrote. "Assuming New York Hub 1% resid prices of $11.25/MMBtu (averaged $12.12 last week) for late February would then imply a likely March Henry Hub bidweek price range of $7.50-8.50/MMBtu..." Smith noted that the Henry Hub contract closed at $8.18/MMBtu on Jan. 11, compared with $7.81/MMBtu on Jan. 4.

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