Prudential Sees Bull Market Running Two More Years
With gas futures prices soaring to a new record past $5, now is
not a bad time to raise price forecasts and expectations for the
coming winter and next year. Prudential Securities did just that
last week by upping its predictions on spot wellhead prices to
$4.10 for the second half of the year, $3.55 for all of 2000 and
$3.65 for 2001.
"[W]e believe the natural gas industry could continue its
bullish run for another two years or more and the next 18 months
look like a 'lay up,'" the investment banking firm said in its
latest quarterly report on natural gas fundamentals. Below average
storage inventories and increasing gas-fired electric generation
demand should keep the bull market running, the report stated.
Prudential expects storage to end the injection season at about
2,660 Bcf, or 11% below last year's level. "This is assuming that
the average injection rate is at or above the eight-year historical
average during that period, and so far this year refills have been
at or below the historical average. Depending on the winter
weather, the industry typically consumes 2,000-2,500 Bcf out of
storage inventories, which would likely bring storage levels down
close to record lows next spring."
Prudential expects supply tightness to continue even with the
addition of the 1.325 Bcf/d Alliance project, which is due to come
on line next month. "[W]e question whether the Alliance pipeline
will add incremental supplies to the U.S. or simply displace gas
supply out of the Alberta region currently flowing down the
TransCanada pipeline system." Prudential predicts Alliance will
open up Oct. 2 with 600-700 MMcf/d of gas flowing. "The perception
of the continued tightness in the gas supply picture is likely to
result in an increase in volatility in natural gas prices."
Prudential also estimates that 1.5 Bcf/d of gas demand has been
added this summer by new gas-fired power plants going on line.
"Over the past few weeks, over 2,400 MW of new merchant capacity
has been added to the grid, equating to about 480 MMcf/d of
capacity. Earlier in the summer, 3,600 MW came on line and another
1,780 MW started up in May. In aggregate, about 7,800 MW of new
summer generation load could collectively consume 1.5 Bcf/d, which
is likely to be diverted from storage injections."
The firm estimates that wellhead deliverability will pick up
significantly. The rig count has grown 48% since last year.
Production from the deep-water Gulf of Mexico is expected to add
3.6-4 Bcf/d of new supply, "more than offsetting the deliverability
decline, but shy of total expected new demand. We forecast gas
demand will rise 3.1% in 2001, fueled by growth in merchant power
Prudential noted that on the books is another 37,000 MW of
additional new gas-fired generation capacity to be installed next
year and 43,200 MW in 2002.
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