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Analyst: Extreme Summer Could Lead to $18-20/MMBtu Gas

As crude futures climbed north of $144/bbl for the first time ever and natural gas futures hovered around the $13.50/MMBtu area last week, Stephen Smith, of Stephen Smith Energy Associates, said fundamental factors within the market this summer could push natural gas prices as high as $18-20/MMBtu.

Looking at the various possibilities that could arise during the storage refill season, Smith said natural gas prices could head in two very different directions. He said the upside remains open due to possible summer heat, hurricane production shut-ins in the Gulf of Mexico and the threat of still higher crude oil prices. However, if an average summer is experienced, hurricane damage is minimal and oil prices settle down, there is the "possible easing" of gas prices in the fall.

"If it is as hot as last summer, and by early September 100-300 Bcf appear to be lost to hurricane shut-ins, and WTI [West Texas Intermediate crude] averages $140-160 for the next few months, then a summer gas price peak near $18-20 would not be out of the question," Smith wrote in his Weekly Gas Outlook. "Some less extreme combination of these factors could lead to the $15-18/MMBtu range."

According to the Energy Information Administration, working gas in storage stood at 2,118 Bcf as of June 27. Stocks are 381 Bcf less than last year at this time and 57 Bcf below the five-year average of 2,175 Bcf. Prior to Thursday's report of an 85 Bcf injection, Smith said the current storage situation could get interesting.

"We are projecting a gas storage surplus of 337 Bcf [over the 10-year average] for the week ending June 27. This would be a decrease of 2 Bcf from the week before, on total DDs [degree days], which were approximately normal. The current surplus storage level remains close to being the lowest since the aftermath of Hurricanes Rita/Katrina in the fall of 2005," Smith said.

However, the analyst sees a resurgence of supply-building coming in the fall. "Even our base case assumptions show...a 50 Bcf decline in the storage surplus [over the 10-year average] between June 27 and the end of August," Smith wrote. "But the CDD [cooling degree day]-driver of this tightening begins to ease in September and we assume 100% of 2003-2007 HDDs [heating degree days] for the fall (mild by 30-year norms). This, combined with strong U.S. production growth, could lead to storage levels in the range of 3,500-3,550 Bcf by early November (the chart shows 3,550 Bcf), which would be close to last November's record level."

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