With record high spot and futures prices last week, continuedcold weather and bullish supply and demand projections, LehmanBrothers didn’t pick a bad week to raise its Henry Hub priceforecasts by about 20% for both 2001 and 2002.

“It looks like we’re still working at pushing a large rock up asteep hill,” noted Lehman Brothers analyst Rick Gross. “We justhaven’t seen the things you would expect to see as precursors to areversal in the strong price environment, and that would include amuch stronger supply response, a stumble into the heating seasonwith warm weather and those kind of things.”

The weather has been colder than normal to date and the storagedeficit compared to levels at the same time last year has widenedto 500 Bcf, Gross noted. “We think that the short-term forecast issuch that we’re going to see that gap widen by the end of December.We think it’s going to be in the 600 Bcf [area].”

Despite the expected continuation of normal and below normaltemperatures across many major markets over the next six to 10days, Gross noted that it is still too early in the heating seasonto foresee potential delivery problems. Although storage levels arelow compared to last year, there still is plenty of gas in storageavailable to meet near-term peaking needs. The real problem couldcome at the end of the winter if storage levels are extremely lowand there is another cold snap.

“We’re looking at an exit rate for storage [at the end of thewinter heating season in April 2001] at very low levels,” he said.”We have internal debate, but we think it will be around 400-500Bcf [of working gas]. And the ability to replenish it next summeris going to be difficult given that we’ve still got a reasonablystrong economy, and we’ve got some more power needs with some newcapacity coming on. We wouldn’t be surprised if we see going intonext heating season that inventories are in the 2,400 to 2,500 Bcfrange, which is even thinner than this year.”

Despite a gas rig count that is 30% higher than the same timelast year, Lehman Brothers is not expecting a huge supply reactionto the current record prices, said Gross. “Basically what we’relooking at is a supply response from greater drilling activity butinsufficient to meet growing demand and replenish depletedinventory.”

Gross raised his Henry Hub spot price forecast from $4.20 to $5for 2001 and from $3.50 to $4.15 for 2002. “Obviously the[12-month] strip has blown through those numbers for both years,but we’ve been reluctant to chase the strip. We’ve had very highgas price forecasts since last May relative to many of ourcounterparts. Obviously the strip can get fairly emotional whenit’s moving a buck a day. Usually we have seasonal differences inour forecast compared to the strip. It was about $5.70 on Monday,”he noted.

Rocco Canonica

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