Despite Warming Forecast, SSB Lifts Price Prediction
Discounting recent short-term predictions for warmer weather, Salomon Smith Barney added another 75 cents to its gas price forecast for this year. The prediction now totals $5/MMBtu at the wellhead or about $5.15 at the Henry Hub, but SSB still fears it may be too low given the storage and gas production situation.
Snowcover in the Midwest and Northeast and the absence of La Nina this winter should prevent a warming trend from taking hold in the major midwestern and northeastern market regions, SSB analysts Robert Morris and Michael Schmitz said in an exploration and production note last week.
Temperatures through November and December (measured by heating degree days or HDDs) were roughly 20% colder than the 10-year average. However, the National Weather Services' recent six- to 10-day forecasts show much warmer weather on the way for a broad portion of the United States. "Any trend to much-warmer-than-normal temperatures during the last three months of this winter (January through 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 for winter-ending natural gas storage levels has dramatically changed from our 'Worst Case' scenario, thus prompting our revised forecast."
The American Gas Association (AGA) storage report last week of the largest withdrawal so far this winter helped support SSB's price forecast. The AGA reported a massive 209 Bcf of gas was withdrawn from storage last week, leaving only 1.7 Tcf left for the bulk of the winter heating season. Total working gas levels are 558 Bcf, or 24%, below the five-year average and storage in the Eastern Consuming Region is only 56% full. SSB's models now indicate that if the remainder of this winter matches the 10-year average, then storage levels at the end of March will approach 675 Bcf.
"If January through March is more than 4.5% colder than the 10-year average, then withdrawals are likely to test the 500 Bcf physical limitation on overall storage levels toward the end of this winter," the analysts said, echoing recent comments by many other market observers.
As a result, the "heat" is likely to remain turned up on gas prices through next summer. SSB's current forecast shows a quarterly 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 variables are the pace of economic expansion and the growth in domestic gas production.
SSB has been relatively optimistic on gas production growth compared other recent forecasts. It admitted last week that it may have to lower its projections in light of recent comments made by producers. SSB is predicting a 5.8% uptick in production in 2001. "However, the view from several companies in the 'trenches' is that drilling efficiency has dropped off much more sharply than we have assumed," Morris and Schmitz said in their report. "In fact, several companies have indicated to us that they believe production additions for the most recent 100-250 domestic natural gas rigs is about one-half of that for the first 500-600 rigs put to work industry-wide." Reflecting that view is a recent report by the Independent Petroleum Association of America projecting production will 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 2001 is just 1.25% and domestic natural gas production rises only 1.5% this year, then storage levels at the beginning of November, or the traditional start of the storage withdrawal season, are likely to be no more than 2,600 Bcf, thus portending a potentially more dire natural gas price landscape than this season." As a result, SSB said it may have to raise its price projections for 2001 and 2002.
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