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Analysts Expect Return of Price Spikes During 1Q99

October 26, 1998
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Analysts Expect Return of Price Spikes During 1Q99

With storage levels already above 3 Tcf, few observers are expecting the industry to have any trouble meeting gas demand early this winter. But the first quarter of next year, could provide a market test not seen in the past two winters, several analysts warned last week. In its October Short-Term Energy Outlook, the Energy Information Administration (EIA) seems to agree.

Raymond James &amp Associates Equity Research group told its clients last week a return to normal temperatures this winter could bring a greater gas market surprise than expected. Winter consumption spikes over the past two winters have trended downward, but that was because winter 1996/97 was nearly 5% warmer than normal and last winter was nearly 9% warmer than normal, the firm noted. Normal weather likely will bring a significant increase in consumption, particularly during the first quarter of next year, and with it a significant increase in gas prices this winter compared to last.

"The bottom line is that the past two exceptionally warm winters may have lured investors and gas consumers into a false sense of security regarding the possibility of spot gas shortages this winter," the investment group said. "A return to even normal winter weather could lead to surprisingly large winter gas demand spikes. As recently as three years ago, such a demand surge caused natural gas prices to spike upward into the double digit range."

Raymond James &amp Associates' estimates show that a return to normal weather this winter would lead to an 8% year-to-year increase in gas consumption. "If our gas distribution system is not prepared for this demand swing, look out for significantly high gas prices at least for short periods this winter."

The EIA is predicting wellhead prices for the first quarter of 1999 to average 50 cents higher than the prices in the first quarter of 1998, which were depressed because of the unusually warm first quarter of this year. For the fourth quarter, however, assuming normal weather, EIA expects prices to be almost 13% less than prices for the same period last year because of the much larger cushion of stored gas going into this winter and lighter gas demand because of slower economic growth. "[W]e expect fourth quarter 1998 heating demand to be slightly below the year-ago level," EIA said in its October Short-Term Energy Outlook.

The American Gas Association's storage report last week showed another strong week of injections, with 58 Bcf stored during the week ending Oct. 16. Currently working gas levels are at 3,010 Bcf, which is only 78 Bcf less than the highest level entering winter in the past four years and there still are several weeks left in the injection season. Such a high level of gas in storage, 227 Bcf more than at the same time last year, should assist the industry in meeting increased demand this winter. According to the EIA, the industry will need that extra help.

"Next year, a much broader natural gas demand growth profile is likely, particularly if a normal or colder-than-normal winter occurs," EIA said. Base case demand is expected to be almost 9% above year-ago levels in first quarter 1999. Gas demand is expected to grow across all sectors in 1999 under the assumptions of normal weather conditions and continued economic growth. Gas demand is projected to rise by 3.8% in 1999." Average wellhead prices next year are projected to increase by about 10%.

Wefa Inc.'s gas consulting division also came out with a report last week cautioning clients about the likelihood the La Nina weather pattern this winter will cause temperatures to vary significantly from normal, particularly in the Midwest and Northeast regions, and gas prices to spike. "Consequently, we believe the Nymex strip prices for January through March are on the low side," Wefa said, noting the most likely time to see colder than normal weather this winter is between January and March. The November-March strip was $2.39 on Friday and slipping.

Rocco Canonica

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