Analyst Sees Gas Prices Dropping Through July

Even though experts predicted the energy market would make a U-turn, "it is always painful when reality slaps you in the face," according to Raymond James Energy's "Stat of the Week." As early as April, energy analyst Marshall Adkins predicted mid-$5/Mcf prices were not going to be sustainable with expected large gas injections. Through July, he predicts natural gas prices will continue to fall.

That said, Raymond James energy analysts expect increased summer demand to push prices back between late July and August. Natural gas prices rising, however, will depend on several factors: year-over-year gas storage trends, warmer weather, and coal-fired electric production "before we can gauge just how much gas prices may improve" in that time frame.

"Given these natural gas uncertainties, we continue to remain very cautious/bearish on both the exploration and production and the oilfield services groups, at least through the second week of July," Adkins reported.

News about falling natural gas prices follows reports that energy stocks, especially for companies doing business along the West Coast, have dropped in reaction to the Federal Energy Regulatory Commission's western power price mitigation order (see NGI, June 25).

Raymond James analysts noted that even though natural gas prices have "deteriorated fairly consistently since mid-April, the energy stocks held up remarkably well through May." The "hype" surrounding President Bush's proposed National Energy Policy "created a euphoria around energy stocks that was not supported by the steadily deteriorating natural gas prices."

Still, even though April predictions generally occurred, Adkins noted that natural gas prices have not come down as much or as quickly as predicted. "Given that fuel switching represented the lion's share of the reduced gas demand (or increased gas injections), we figured that natural gas prices would likely fall slightly below residual oil price levels to stimulate gas demand as consumers switched back from residual to natural gas."

However, gas prices have remained above residual fuel oil prices, depressing natural gas demand even as gas storage has been "exceptionally robust." Because of these factors, Raymond James does not believe gas prices will go back up until fuel switching is eliminated or warmer weather drives natural gas-fired electric demand" back up.

"As usual, weather is the major wild card in the natural gas equation," Adkins wrote. Another factor would be an increase in coal-fired electric generation. "Coal-fired electric generation continues to ramp steadily upward at a pace of 4%-6% higher than last year. If this increased pace continues through the summer (which we do not expect to happen), then this new coal-fired electric supply could displace on-third to one-half of the increased demand that we previously expected for natural gas-fired electric generation."

Raymond James analysts said they would remain cautious/bearish on the energy group "for at least another month until we get past the gas injection number for the week of July 4," expected to be reported on July 11.

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