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Analysts: Price Woes in 1999?...Maybe

January 11, 1999
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Analysts: Price Woes in 1999?...Maybe

Will production declines expected to stem from the recent rash of producer spending cuts (see related story) lend support to gas prices this year? Well that's just one of several questions on the minds of analysts as they speculate on what the market will grant producers this year. While there's not a consensus, the general mood seems to be pessimistic.

"There's not much holding [gas prices] up," said Thomas J. Woods, Ziff Energy vice president for U.S. Gas Services. Woods said Ziff has been warning its clients that current prices are not supportable. "We had put out some early warnings in July when prices first frayed, and we said that there was a very significant possibility that this would go [on]."

Ziff doesn't release its price projections, but Woods conceded compared to its peers, Ziff Energy is "probably a lot more conservative about gas prices." Woods said he doesn't think the Nymex will average more than $2.00 for 1999, and it could be noticeably lower.

He noted in the aggregate, gas sales have been essentially flat. "There's probably going to be no growth in gas sales for four or five years on an aggregate basis." December's high storage levels suggest to Woods there is more downward pressure on prices to come. "Sooner or later somebody is going to have to move that storage or somebody is going to leave that gas in storage and pay the penalty."

And there is increasing pressure on processors and producers now due to low liquids prices relative to gas prices, noted Woods. Producers, who once were able to pay for processing with liquids removed from the gas stream, now are being asked to pony up with processing fees.

What remains to be seen, according to Woods, is whether prices will ease down further or plummet. "The question is what's the magic witching price for the strip price going out 12 months that would really panic people. I would watch the December of 1999 [contract] or January or February of 2000. If they can hold even though the market is plunging, then you're going to have a soft landing. But if they start to not be able to hold, then you're going to have a hard landing."

Not so pessimistic is PaineWebber's Ronald Barone. "We're still at $2.40 [composite spot wellhead price] for the year, but we could be a bit on the high side because of the surplus gas in storage and the overhang. I'm not going to cut [the estimate] yet because I think it's a doable number." Barone said he thinks this summer's prices will be in the low $2.00 range, noting there will be a lot of gas-fired generation coming on line, "and I think that gas-fired capacity will push up demand." Further, recent declines in drilling activity will begin to take their toll on productive capacity, further tightening supply, he said.

Jefferies &amp Co. analyst Carl Kirst said his firm will release lowered price estimates today. Last week, the official Jefferies prediction was $2.15 for a national average at the wellhead and $2.35 at Henry Hub. "Clearly, we're reassessing our first quarter and our 1999 outlook. At the same time while you have some risks here in the first quarter, particularly over the next three to four weeks, if you have normal weather from here to the end of March, our models are basically putting out we can get to the same storage level we had last year." That is, Jefferies still thinks the industry can eat through a storage overhang greater than 600 Bcf.

With that Kirst said prices this year could be "a little bit better" than last year's. While he said Friday that today's revised estimate would be lower than the previous $2.15, it likely would be stronger than 1998's $1.95.

Jefferies is expecting storage at the beginning of injection season, Nov. 1, to be 150 to 200 Bcf below the same time last year. That's based on projections for a 2.4% demand increase over last year coupled with flat domestic supply, noting a slight increase in imports from the Northern Border expansion. "The wild card is, 'gee, do you actually see a decrease year over year in production?' I guess if there is a piece of the puzzle everybody has their eye on, I think that's it." For next August and September, Jefferies predicts flat demand growth from last year because this summer is not expected to be a repeat of last year's scorcher. Noted Susannah Hardesty, president of Energy Research &amp Trading Inc., "With La Nina weakening slightly this summer, expect cool temperatures, wet weather and an active hurricane season." We'll see, said Kirst. "Keep in mind the conventional wisdom was La Nina was going to bring a brutally cold winter."

Gas analyst Ron Denhardt of Burlington, MA-based WEFA Inc. said his firm is forecasting $2.02/MMBtu at the Henry Hub for 1999. The big market movers in "the coming months are going to be clearly storage and weather. I guess we were assuming a somewhat warmer than normal January through March, and we came up with storage [inventory] 450 Bcf ahead of last year [for the first quarter]. We see that storage as being a big overhang." Compounding the situation in his view are more hydropower due to greater rainfall in the Northwest, growing gas supplies from the Northern Border expansion, and low oil prices. Woods said oil already has captured significant amounts of the market in the East.

Price predictions are subject to revision and sometimes little more than guesses, and there's nearly an entire year left to see what happens, but "eventually a normal winter has to come the industry's way."

Joe Fisher, Houston

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