Many industry analysts have been steadily raising their gasprice forecasts because of the year-long drilling slump and itspotential impact on gas deliverability, but St. Petersburg,FL-based Raymond James &amp Associates went out on a limb last weekpredicting sharp price spikes above $10/Mcf at the Henry Hub nextwinter and an average of $3/Mcf at the hub next year.

“Given that we think there is a significant potential for spotnatural gas shortages next winter (winter of 1999/2000), we believethere is substantial potential for U.S. natural gas prices totemporarily move into the double-digit range,” Raymond James energyanalyst J. Marshall Adkins said in a gas market report. “Perhapsmore importantly, this kind of supply shock would likely awaken thenatural gas markets to the true underlying gas supply and demandfundamentals. Such an awakening should drive average 2000 naturalgas prices well above levels we have seen in the past. We believethat once the U.S. gas markets receive their wake-up call thiswinter, average gas prices above $3/Mcf in 2000 are veryrealistic.”

Adkins noted that simply a return to normal temperatures nextwinter will boost gas demand 8% compared to last winter. Meanwhilea conservative prediction on gas supply shows at least a 2% drop,or about 1.2 Bcf/d. Some producers, such as Enron Oil &amp GasChairman Forrest Hogland, are expecting much larger declines of upto 3 Bcf/d.

With strong demand and short supply (even including a 5% rise inimports from Canada), the existing storage surplus will be depletedrapidly, the Raymond James report stated. The American GasAssociation reported another week of minute injections lastWednesday. On April 23, there was 1,374 Bcf of working gas in U.S.storage facilities and the surplus compared to last year was downto only 175 Bcf, the AGA said. Raymond James expects there to bethe typical 3,100 Bcf of working gas in storage by November, butwith the decline in wellhead deliverability, withdrawals fromstorage next winter will far exceed the normal pace.

“Our numbers suggest that we will exit the winter settingall-time record lows for natural gas storage,” Adkins said,predicting storage will end the winter with only 270 Bcf of workinggas, a historic low that would be difficult to reach. There’s a 70%probability storage will end the winter heating season below 700Bcf and “history suggests that ending storage below 700 Bcf shouldresult in $10/Mcf or higher gas prices.”

“What if our base case is wrong” Raymond James asked, and wintertemperatures are 5% warmer than normal? Gas storage still would endthe winter below 700 Bcf. And given the incomprehensiblepossibility that winter temperatures could be 5% colder thannormal, Raymond James said there would be a need to draw downstorage to negative 141 Bcf of working gas by March 31. “In eithercase, we have a problem.”

Rocco Canonica

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