Joining the growing list of concerned analysts, UBS Warburg’s Ronald Barone said that with continued lackluster fundamentals and falling prices this week in the natural gas industry, he would not rule out a “similar decline” in spot prices next week as well. In conjunction, Barone said UBS Warburg will take the step that some of its peers have already taken this week and release an updated 2001/2002 composite spot price forecast, along with earnings per share reductions, next week.

Barone said the storage situation is “not looking good” for a strong natural gas market. According to the American gas Association, 91 Bcf was injected into storage for the week ending Sept. 21. This injection compares to 90 Bcf in the prior week, 77 Bcf last year and 79 Bcf the year before. The sizeable injection expanded the year-over-year surplus by 14 Bcf to 446 Bcf from the prior week.

“Looking ahead, given the continued lackluster temperature/demand outlook, highly attractive arbitrage (and the following four year-ago comparisons of 78, 62, 29 and 71 Bcf), we continue to expect incremental growth in the surplus prior to the start of the heating season,” said Barone in UBS’ Research Note. “Realistically, unless Mother Nature delivers a substantially cooler than normal fall, we would expect supplies to approach (and potentially surpass) the 3.2 Tcf mark by Nov. 1, possibly even reaching the 3,294 Tcf stated capacity.”

Gas in the ground currently stands at 2,848 Bcf versus 2,402 Bcf last year. Barone said that going forward his calculations suggest weekly injection requirements of 27 Bcf to reach the 3 Tcf level by Nov. 1 and 62 Bcf to reach 3.2 Tcf.

The analyst also pointed to the steady decline of natural gas futures prices, made evident as the October contract closed at $1.83/MMBtu, marking the lowest prompt contract expiration in 30 months. Barone pointed out that the $1.83 close compares to the $2.30 final close of the September 2001 contract and the $5.31 close of the October 2000 contract.

As gas prices continue to fall off, Barone noted that U.S. drilling rates are also declining at a “fairly rapid” pace. He said the total U.S. rig count for the week ending Sept. 21 fell 16 rigs to 1,186, which compares to 998 last year. The Canadian rig count also showed losses, dropping 13 rigs to 344 for the week ending Sept. 21.

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