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Analysts Conservatively Forecast Prices Will Average $3.25 in 2000

Analysts Conservatively Forecast Prices Will Average $3.25 in 2000

With June natural gas futures soaring to a dizzying high of $4.50 last week, projections by Lehman Brothers and Salomon Smith Barney that spot prices will average $3.50 the rest of the year seem a bit too conservative. A few weeks ago, those price levels would have seemed astronomical.

In a research note released May 19, Robert Morris of Salomon Smith Barney, said he expects prices to average $3.50 during the third quarter and $3.75 during the fourth quarter of this year. His full-year 2000 composite spot price forecast is now $3.25/MMBtu (raised from $2.78/MMBtu) and his 2001 forecast is $3.25/MMBtu, up from $2.65/MMBtu. Morris, however, admits these prices could be on the low side. The 12-month strip on Friday was $4.15 and the six-month strip was $4.239.

"[W]e expect deliverability to be off at least 1 Bcf/d this summer compared with last year. This is based on a, perhaps aggressive, assumption that the domestic natural gas rig count expands to 700 by November (the domestic natural gas rig count is currently 634). In addition, our analysis indicates that the domestic gas rig count would have to rise above 800 just to return domestic deliverability to where it stood at the beginning of 1999.

"In the interim, we expect the demand to increase due to continued economic expansion and the start up of new gas-fired electric generating capacity. Also, we don't expect much help from Canada this year with the fundamentals and storage outlook similar to the U.S."

Meanwhile, Richard Gross, senior vice president of Lehman Brothers Energy Research, said he expects Henry Hub prices will average $3.30 this year and $3.35 in 2001.

The industry simply "can't fill storage and meet power needs this summer," Gross said in an interview with NGI last week. "We're going to get pretty high prices and we aren't going to get storage filled. As a result, we are going to have $3.25/MMBtu gas this year (average wellhead price) and $3.35 next year, and if we're wrong these prices are too low."

Gross, who discussed the booming market at the mid-year meeting of the Independent Petroleum Association two weeks ago, said he expects to see 2,600 Bcf of gas in storage on Nov. 1 if the industry can match the injection pace of 1999 over the same period, and that's a big "if."

"We've run about 2.2 Bcf/d less [than that] season to date. We've got about 20% of the season complete. The big fill --- whether we make or break the year --- is probably the next four or five weeks," he said. "Once we get into the cooling season, it's going to be tougher to get some of the big [injection] numbers. We'll get another crack at it in September and October, depending on what kind of weather we get. But so far, the early returns show it will be a struggle to meet both markets."

Gross noted that last winter the industry relied more heavily on storage for supply than in recent years because of a decline in wellhead deliverability. Although wellhead deliverability probably will improve some by next winter, the reliance on storage still is expected to be significant. "If you look at the draw per degree day in the last five years, it goes from about 0.35 Bcf per degree day draw to 0.50 Bcf, 0.55 Bcf and to last year when it was 0.64 Bcf per degree day. For each degree day we get, even if it's getting warmer and warmer, we are utilizing storage more to supplement wellhead supply. I don't think normalized is 0.64 Bcf per degree day; I think it's probably in the high 0.50s Bcf. It's because we've been short [wellhead supply]. We basically lived off of storage in 1999; that's how we balanced the market. We won't have that luxury in 2000 and 2001.

"Every which way you twist and turn and look at the market, it just feels tight. If you talk to the processors (Dynegy, Duke, Williams...) they'll tell you they are still struggling a little bit. All of these things tell us it is going to be very difficult to serve both masters this summer."

Gross said he doesn't expect producers to return to 1997 levels of wellhead deliverability until 2002. "All of this is predicated on fairly high drilling levels; for instance, the average between 2000 and 2004 has to be 50% higher in drilling activity than the previous five years. Those are big-time assumptions. We've got to man those rigs. We've got to develop those prospects. We'll see where we go. I'm a firm believer in the resource base. I spent most of my 25-year career as an E&P analyst so I'm relatively sanguine about the response. It's just that there's a lag, which makes 2000 and 2001 pretty tight."

Another bullish factor is hydroelectric generation, which is short this year. "If you look at past years of depressed demand, they have been very good hydro years. This year is going to be mediocre, and that's a big swing. In California alone, from a really good year to a crummy [hydroelectric] year, it is 300 Bcf of demand, and in the second quarter it is probably 2 Bcf/d. It's huge. We are seeing it right now. They have a couple of nukes down out there. Normally they would get hydro, but they aren't getting it this year." He said hydroelectric generation in January was down more than 10%.

Gross estimates that there is going to be an additional 1 Bcf/d of gas demand for power generation this summer compared to last year. Another noteworthy factor is that when nukes go down this year, the impact on the gas market likely will be greater than in years past, he said, because the market is relying more this year on existing nuclear power. Nuclear generation plants are operating at much higher efficiency rates compared to years past. "The risk is that the nuke fleet doesn't operate like champs moving forward. One breaks down, it's a big deal; it's 1,000 MW a pop."

Rocco Canonica

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