Lehman Raises '04 Gas Price Estimate 11%
Lehman Brothers on Friday increased its 2004 natural gas price estimate 11% to $5/MMBtu, even though it noted in a report that the recent storage withdrawals have been disappointing.
Analyst Thomas Driscoll said that the 25% rise in gas prices since December may have lowered demand, with January prices up $1-$1.25/MMBtu from December. Demand losses are a "likely" part of the reasoning behind the weak storage draws, but there also may be anomalies in the government data that led to the sharp fall-off in withdrawal rates. In the last two weeks, withdrawals have been 156 Bcf and 153 Bcf respectively -- the largest of the winter season -- according to the Energy Information Administration.
Higher withdrawals had been expected because of the cold Northeast temperatures, said Driscoll. "Our concern about gas demand has arisen as a result of disappointing storage withdrawal figures over the past three weeks."
Overall, the analyst noted that gas withdrawals from storage have been 16 Bcf/week lower than indicated by a 2003-2004 regression. A 23 Bcf/week swing may imply that demand has weakened by about 3 Bcf/d, but the colder weather should have resulted in draws that were 19 Bcf higher than those of the third week of December 2003. Instead, withdrawal rates were similar.
Driscoll also noted that it was "troubling" that the level of gas storage was on a track to end the season with more than 1,200 Bcf, which he said is high. However, as the market moves into a late winter and shoulder month cycle, he forecast that February and March should average 50 cents to $1.25/MMBtu less than the January bid week pricing of more than $6/MMBtu. The pricing would allow the market to encourage more gas consumers into increasing consumption, the Lehman analyst said.
Cash flows for producers also will be strong with the recent higher prices, he said, but contended that the exploration and production companies should work to return some of the extra cash to shareholders. "Investors appear to believe that companies spending most aggressively are destroying capital," Driscoll said.
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