Discounting recent short-term predictions for warmer weather,Salomon Smith Barney added another 75 cents to its gas priceforecast for this year. The prediction now totals $5/MMBtu at thewellhead or about $5.15 at the Henry Hub, but SSB still fears itmay be too low given the storage and gas production situation.

Snowcover in the Midwest and Northeast and the absence of LaNina this winter should prevent a warming trend from taking hold inthe major midwestern and northeastern market regions, SSB analystsRobert Morris and Michael Schmitz said in an exploration andproduction note last week.

Temperatures through November and December (measured by heatingdegree days or HDDs) were roughly 20% colder than the 10-yearaverage. However, the National Weather Services’ recent six- to10-day forecasts show much warmer weather on the way for a broadportion of the United States. “Any trend to much-warmer-than-normaltemperatures during the last three months of this winter (Januarythrough March) is unlikely given the absence of La Nina conditions,which limited the penetration of arctic air masses into the U.S.last winter,” the SSB analysts said. “Therefore, our outlook forwinter-ending natural gas storage levels has dramatically changedfrom our ‘Worst Case’ scenario, thus prompting our revisedforecast.”

The American Gas Association (AGA) storage report last week ofthe largest withdrawal so far this winter helped support SSB’sprice forecast. The AGA reported a massive 209 Bcf of gas waswithdrawn from storage last week, leaving only 1.7 Tcf left for thebulk of the winter heating season. Total working gas levels are 558Bcf, or 24%, below the five-year average and storage in the EasternConsuming Region is only 56% full. SSB’s models now indicate thatif the remainder of this winter matches the 10-year average, thenstorage levels at the end of March will approach 675 Bcf.

“If January through March is more than 4.5% colder than the10-year average, then withdrawals are likely to test the 500 Bcfphysical limitation on overall storage levels toward the end ofthis winter,” the analysts said, echoing recent comments by manyother market observers.

As a result, the “heat” is likely to remain turned up on gasprices through next summer. SSB’s current forecast shows aquarterly breakout of $6.75/MMBtu in 1Q2001, $4.75/MMBtu in 2Q,$4.25 in 3Q and $4.25 in the fourth quarter. The two key variablesare the pace of economic expansion and the growth in domestic gasproduction.

SSB has been relatively optimistic on gas production growthcompared other recent forecasts. It admitted last week that it mayhave to lower its projections in light of recent comments made byproducers. SSB is predicting a 5.8% uptick in production in 2001.”However, the view from several companies in the ‘trenches’ is thatdrilling efficiency has dropped off much more sharply than we haveassumed,” Morris and Schmitz said in their report. “In fact,several companies have indicated to us that they believe productionadditions for the most recent 100-250 domestic natural gas rigs isabout one-half of that for the first 500-600 rigs put to workindustry-wide.” Reflecting that view is a recent report by theIndependent Petroleum Association of America projecting productionwill rise by only 1.5% in 2001.

“Perhaps our deliverability projection could prove aggressive,”Morris and Schmitz said. “If U.S. GDP growth, on average, in 2001is just 1.25% and domestic natural gas production rises only 1.5%this year, then storage levels at the beginning of November, or thetraditional start of the storage withdrawal season, are likely tobe no more than 2,600 Bcf, thus portending a potentially more direnatural gas price landscape than this season.”As a result, SSBsaid it may have to raise its price projections for 2001 and 2002.

Rocco Canonica

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