Natural gas industry analysts at Deutsche Bank have concludedthat a “structural shift” has occurred in the supply and demandunderlying the gas market, setting the stage for gas prices to holdtheir current ground at more than $2.50 for the next two years.
“In our view, the old trading range of $2.00-$2.50/MMBtu hasbeen supplanted by a new $2.50-$3.00 range for wellhead prices,”the group said in a report last week.
The group raised its wellhead price forecast to $2.75/MMBtu for2000 and 2001 from $2.35 and $2.50, respectively. It forecastsNymex futures to average $2.90 in both years, up from priorforecasts of $2.50 for 2000 and $2.65 in 2001.
As evidence of the “shift,” Deutsche Bank notes that despite thewarmest winter on record and a dip in oil prices, gas futuresprices are trading above $3 on the New York Mercantile Exchange(Nymex). “We attribute this strength to a growing recognition thatdomestic demand is likely to outstrip supply, leading to both lowerstorage and the need for higher import levels — and higher pricesin 2000.”
On the demand side, the group notes that industrial productionis picking up, power demand is growing and gas is the fuel ofchoice for new generation. Deutsche Bank projects demand willincrease 3.8% to 22.2 Tcf this year and an additional 2.6% to 22.8Tcf in 2001, which is up significantly from the 1% growth in 1999.After declining slightly in 1999, industrial gas use is expected toclimb 4.6% in 2000 and 3% in 2001. Electric utility consumption isforecast to grow 5.4% this year and 2% in 2001 despite its 4% droplast year. Residential demand is expected to slide some this yearbecause of the warm first quarter but should rebound with 2.5%growth next year, the group predicted.
Meanwhile, despite higher capital spending, domestic gasproduction is not keeping pace and probably will continue tostruggle this year and next. Deutsche Bank analysts said theyexpect domestic supply to rise by less than 0.2 Tcf to 18.85 Tcfthis year after flat production in 1999. “The increase in gasprices, which started in 2Q99, has resulted in a rise in gasdrilling, but the types of wells being completed are tending towardshallow, onshore locations, which are not as productive as thedeep-water offshore areas,” the group said. “Drilling budgets forthe larger companies, which have stayed relatively modest so farthis year, could result in lower production than would otherwise beexpected.” It estimates Gulf production will rise significantlyfrom 5.8 Tcf in 1999 to 6 Tcf this year and 6.2 Tcf in 2001. Outputfrom the rest of the U.S. in total, however, is expected tocontinue shrinking from about 13 Tcf in 1998 to 12.8 Tcf in 2000and 12.7 Tcf in 2001.
Furthermore, storage levels are near normal and are expected tobe “quite low by the start of the upcoming winter” because ofdemand growth and supply constraints. The group projects storagewill reach only 2,650 Bcf by the start of next winter.
Imports from Canada are “unlikely to be able to fill the gap.”Many of the wells being drilled are shallow wells with highdepletion rates.
The group admitted its own projections were more bullish thanothers on Wall Street were. It said the “First Call mean,” or thecurrent consensus of Wall Street analysts, is that wellhead priceswill average $2.55 this year and $2.50 in 2001. Rocco Canonica
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