First Albany Still Bullish in Face of Falling Prices

Discounting reports from other Wall Street analysts about permanent gas "demand destruction" and rapid supply growth being the causes of the current price collapse, Robert Christensen of First Albany Corp. said prices have fallen mainly in reaction to strong storage injections this spring and probably will rebound because of minimal supply growth. Christensen released a report last week titled "Still a `No Show'- Natural Gas Supply Growth" that makes a case for remaining bullish in the face of rapidly declining spot prices.

The report concludes that gas supply gains this year will be minimal and will be outstripped by demand growth. Going forward, domestic gas suppliers will struggle to meet long-term demand because of rig availability problems.

Gas production grew a modest 1.4% in the first quarter, according to Christensen's survey of 36 producers. "U.S. natural gas wellhead deliverability remains surprisingly weak in our view," he said. "Our forecast calls for 2001 U.S. wellhead deliverability to rise 2% or 1.1 Bcf/d by mid-year and by 5.8% or 3.2 Bcf/d by year end 2001. While our forecast does call for a pickup in wellhead supplies, we remind investors that these increases merely get us back to where we were two and three years ago, respectively.

"On the other hand, U.S. gas demand will far outpace these increases," he said. "We see U.S. gas demand up 2.8% to 4.5% this spring and summer, versus the comparable seasons a year ago and up over 8% to 10% compared to the 1999 spring-summer season, when wellhead deliverability was about equal to projected 2001 levels."

Christensen said recent reports from other analysts of 5-6 Bcf/d of lost industrial demand because of high gas prices are far-fetched. Although there was a substantial drop in industrial demand during the winter, much of that has returned as prices have declined, he said. The record storage injections and sharp price declines this spring are related to a number of other factors.

"The contango is so much greater this year versus last," said Christensen, referring to the storage situation. "The contango, May to January, last year was 25 cents, and the last time I looked it was more than 65 cents this year, so we have a threefold increase in the incentive to put gas in now and take it out later. Number two, we have about 15,000 MW of new gas-fired generation coming on this summer; you have to front-run that. You flip a switch and that stuff comes on and will be competing with storage. So your only opportunity to get ahead of that really is in May. The third point is the hydroelectric problem," which storage injectors are attempting to compensate for ahead of the summer as well, he said.

Meanwhile, producers are going to find it difficult to continue increasing the rig count. Christensen estimates a need for 1,500-2,000 rigs to meet projected demand. "We say this because despite a 50% increase in U.S. gas drilling in the past 12 months (e.g., the U.S. gas rig count averaged 831 May 2001 to May 2000 versus 560 from May 1999 to May 2000), U.S. wellhead deliverability is up only 1.4%. We attribute this to continued high levels of first-year depletion rates (estimated at 33%), an excessive reliance on development drilling, producers focusing on smaller prospects (that would be uneconomic were it not for $4-$5/Mcf gas), and fewer completions per well drilled."

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