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Energy Service Providers See Price Weakness Ahead

Despite several weeks of 200-plus Bcf storage withdrawals, which have put working gas levels back into the five-year range, buyers should "be patient" and wait for prices to fall over the next few weeks, according to two gas service providers.

"I'd hate to see people panic just because they see these large storage withdrawals," said Chris Albrecht, director of energy procurement at Cincinnati-based Cadence Network Inc., a national energy services provider for multi-site clients, such as department stores and fast food restaurants. "I think it's going to come down still. We're above the five-year average in storage.

"EIA said February withdrawals were the third largest for a single month in the last 30 years or something, but the weather seems to be moderating. I'm holding off recommending to my people that they purchase. For clients that want to do a fixed-price deal, I've been telling them to wait a little bit."

For those that are adamant about locking in right now, Albrecht said he's recommending they go with a Nymex-plus deal with a provision that allows them to lock into a fixed price down the road. "When prices drop they can convert and lock it in. I would say you probably would want to be placing something in March before the injection season kicks in and Texas starts heating up. I would hold off for a little bit."

He said that the gas price trend last spring was an anomaly, not the norm. Hurricanes Katrina and Rita decimated supply and Henry Hub prices in February and March were in the $6.50-7.50 range. "If you go back a few years and look at current prices, we are way above those levels. Do I think we'll ever see $4/MMBtu again, probably not, not for a 12-month strip anyway. If I have a client that wants to do some natural gas deals right now, I will tell him to wait maybe two weeks," said Albrecht. "Prices went up again Thursday, but buyers just need to be patient."

Jon Sorenson of Competitive Energy Services LLC, an energy service provider serving the Northeast and other regions, said he expects the near-month futures contract to head back down to the $6 level or even lower. The March contract was in the $7.70s Friday afternoon.

"We're still 10% higher than the five-year average in storage, still in the upper end of the five-year range, and the cold weather is behind us, so I'm looking for a dollar, perhaps a dollar-and-a-half reprieve here very shortly," said Sorenson. "It won't be in February. It will be in March. Unfortunately I think it will rebound after that. But we could see gas as low as $5.50 in the prompt month before that.

"As soon as we get any heat in the forecast, it's going to bump up," he said. "In the Northeast, Texas and in a little bit of the Midwest they are so dependent on gas-fired generation that if we get any type of early heat it will drive prices higher. The forecast right now is for normal temperatures."

Sorenson, who procures gas and power for commercial and industrial customers, said he's also telling clients to hold off a few weeks before buying. "We're in a holding pattern right now, doing small hedges or dailies. I'm looking for a $5.50-6.00 prompt month, and then we may go long."

He said one problem buyers are facing is next winter's futures strip. Next January and February already are up into the $9.50s. "It's ridiculous. I'd like to see next winter move down a buck or two before we take any positions." The other issue is that strong winter pricing probably will prompt strong storage buying during the injection season and that will hold cash prices up. "It's a viscous volatile circle," he said.

Sorenson said buying strategies will have to remain relatively short-term for the next few years until a large influx of liquefied natural gas (LNG) hits the marketplace. "We're focusing on daily, short and mid-term purchases until about 2008-2009 when we expect to see a lot of LNG come in and flood the market along with a lot of gas production in the Rockies," as well as the Gulf of Mexico and East and North Texas. "Demand is growing 1.6-2.0% per year and we're envisioning a tight market until then."

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