While the gas futures market was on the decline for much of last week and working gas levels in storage moved back above five-year averages, prognosticators at investment banking firm Raymond James & Associates are betting the gas storage situation isn’t nearly as rosy as it seems, and tight supply will end up pushing gas prices back above $8/MMBtu in the next few months.

“We believe the U.S. gas market is in for a rude awakening over the next two months,” said J. Marshall Adkins, an analyst at Raymond James. “If crude oil prices hold in the high $30 to low $40 range, we believe that U.S. natural gas prices are likely to move into the $8 range in the coming months.”

Adkins raised his 2004 and 2005 price forecasts to $6.00/Mcf and $6.25/Mcf, respectively, from $5.99 and $6.30, which is about 80 cents higher than Wall Street averages for 2004 and $1.50 over the Street consensus for 2005.

However, prices currently appear poised to fall, and several other analysts have said recently that they are looking for prices to shift lower in the third and fourth quarters of this year.

With normal cooling degree days and heating degree days, third quarter Henry Hub natural gas prices will average $5.82/Mcf, and fourth quarter prices will be $5.62, yielding an average annual forecast of $5.80 for 2004, Stephen Smith Energy Associates said in its latest Monthly Energy Outlook.

The strip of futures contracts on Nymex for the remainder of the year was at $6.35 on Friday and falling, and the fourth quarter strip was at $6.47 down about 6 cents from trading last Monday. Many market observers are taking the current level of working gas in storage (1,938 Bcf) as a strong indication that working gas levels will end the injection season near historical norms. With only 18 weeks left in the injection season, only 70 Bcf per week needs to be injected for working gas levels to reach 3.2 Tcf. Last year during the same period, injections averaged 83 Bcf/week.

However, Adkins warned that there is about 2.5 Bcf/d less production available in the market this year compared to last year and that fact has been hidden because of mild early summer weather. With oil prices remaining high and the potential for normal or warmer than normal weather, Adkins said storage forecasters are in for a surprise.

“We think the possibility of attaining full storage (i.e., 3,200 Bcf) by the end of October may not be such a lay-up,” said Adkins. “Specifically any meaningful increase in electric-related natural gas demand (as a result of seasonally warmer weather showing up), increase in fuel switching or additional decrease in U.S. related supply will further make achieving full storage a more difficult challenge.”

Over the past 10 weeks, year over year U.S. electricity consumption has been up about 7% without any significant summer heat, he said. If average summer heat shows up over the next couple months, Adkins predicts gas demand will increase by as much as 3-4 Bcf/d over 2003 summer levels. With even hotter weather, demand would rise even further, leaving much less gas available for storage than expected and driving gas prices back into the stratosphere.

Raymond James predicts that working gas levels will enter November at about 2,928 Bcf, “well short of the 3,200 Bcf in storage that the market currently is forecasting.”

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