In the first half of 2007 the price outlook for producers is pretty much the same as it was in the first half of 2006: wait for the second half of the year and beyond for gas price strength, at least according to analysts at Raymond James & Associates Inc.
"Looking forward, 2007 is now shaping up similar to 2006," Raymond James analysts wrote on Wednesday in the firm's monthly energy update for May. A warm winter in 2005-2006 and high year-end 2005 prices led to lower demand and record-high storage levels at the end of winter.
"Likewise, the start of the 2006/2007 winter season was warmer than expected, which depressed gas prices and was the catalyst for our January price forecast reduction for full-year 2007," the analysts wrote. "Consistent with our oil outlook, we believe gas prices will be back-end loaded to exhibit strength towards the end of the year as North American gas supply responds to a slowdown in production growth from the U.S. (and a decline in production in Canada)."
The current Raymond James price forecast is for $7.56/Mcf for 2007. Beyond this year, the firm said it expects to see annual declines in domestic production of 1-4%, "despite likely increases in 2008 capital budgets and drilling activity."
Gas demand will rise steadily through 2008 on the back of growing demand from the power generation sector and a strong economy, the firm said. Price will be the only mechanism to curtail demand. The firm's 2008 gas price forecast is $10/Mcf, predicated on a 7:1 ratio of oil to gas prices.
However, gas prices could rebound to 6:1 parity with oil depending on weather and gas storage levels, the analysts wrote. "Even at $60/bbl oil prices, a 6:1 ratio would imply $10/Mcf natural gas," they noted.
"Notably, further surges in gas prices, similar to those that occurred after the 2005 hurricanes, are entirely possible over the next 12 to 24 months, depending on the weather."
The analysts at Raymond James conceded that their forecasts are somewhat bullish. For 2007 their forecast of $7.56/Mcf is 30 cents above consensus but 37 cents lower than Nymex futures strip pricing. For 2008, their forecast of $10/Mcf is $1.79 above consensus and 99 cents higher than the futures strip.
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