Raymond James: Gas Prices in for 'Wild Ride'

If you thought natural gas prices were volatile last summer, you haven't seen anything yet, according to Raymond James & Associates. During the peak heat of summer 2001, the company forecasts that gas prices will rise above $6/Mcf, and remain above the $5/Mcf mark in the longer term.

Raymond James analyst Marshall Adkins said in an energy brief released last week that there are two possible scenarios for how this summer's gas storage injection season will evolve. The first scenario has storage operators injecting huge amounts of gas over the next few months, "driving market fear up, and gas prices down," said the brief. However, By late July traders would become uncomfortable as storage injections tapered off due to gas-fired generation coming online, driving prices right back up.

The other scenario has storage operators injecting less gas than is available to the market, which allows cash prices to bring the futures market down. But when July and August roll around with operators coming up short on their injection goals, gas prices would soar again, the analyst said.

"In either case, we expect lower gas prices in the near term (below $4/Mcf), much higher gas prices in the heat of summer (above $6/Mcf), and relatively strong gas prices thereafter (above $5/Mcf)," the company said.

According to Adkins, the gas market is currently in a "short-term oversupply situation," which is likely to put downward pressure on prices through June. But as new gas-fired electric generating capacity hits in July, the oversupply is expected to quickly turn to a gas undersupply, which would drive prices "much higher" during late summer.

The report said there is simply too much gas on the market currently, due to a combination of lower demand and higher supplies. By the company's accounts, 3 Bcf/d of demand was erased by fuel switching and 1 Bcf/d was scaled back by lower industrial consumption. On the plus side, record drilling activity has only produced an estimated additional 1 Bcf/d of supply. "Regardless of the origin of the extra gas, it is clear that there is substantially more gas available to inject today than there was at the same time last year," said Adkins.

However, Raymond James does not expect the excess of gas to stay long, especially during the July-to-August period, where it estimates consumption could be 5-to-10 Bcf/d higher than last summer. Regardless of which scenario plays out, Raymond James warns that "gas prices are in for a wild ride this summer."

In the long term, the analyst believes "the gas equation is sufficiently out of balance to where gas prices should remain mostly above the equivalent switching incentive for higher-grade oil products." The switching price is currently between the $5-$5.50 mark.

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