While July gas futures tumbled sharply Monday morning with a low at $6.15, 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 month,” 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 last week said 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 third quarter futures strip on Nymex currently is $6.23 and falling and the fourth quarter was about $6.53 in Monday morning trading. Many market observers are taking the current level of working gas in storage as a strong indication that working gas levels will end the injection season near historical norms. Working gas at the end of last week was nearly flat with the five-year average and about 280 Bcf (18%) higher than levels at the same time last year.

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. 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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