Discounting recent short-term predictions for warmer weather,Salomon Smith Barney added another 75 cents to its gas priceforecast for this year. The prediction now totals $5/MMBtu at thewellhead or about $5.15 at the Henry Hub, but SSB still fears itmay be too low given the storage and gas production situation.

Snowcover in the Midwest and Northeast and the absence of LaNina this winter should prevent a warming trend from taking hold inthe major midwestern and northeastern market regions, SSB analystsRobert Morris and Michael Schmitz said in an exploration andproduction note this week.

Temperatures through November and December (measured by heatingdegree days or HDDs) were roughly 20% colder than the 10-yearaverage. However, the National Weather Services’ recent six- to10-day forecasts show much warmer weather on the way for a broadportion of the United States. “Any trend to much-warmer-than-normaltemperatures during the last three months of this winter (Januarythrough 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 forwinter-ending natural gas storage levels has dramatically changedfrom our ‘Worst Case’ scenario, thus prompting our revisedforecast.”

The American Gas Association (AGA) storage report yesterday ofthe largest withdrawal so far this winter seemed to confirm thatoutlook. The AGA reported a massive 209 Bcf of gas was withdrawnfrom storage last week, leaving only 1.7 Tcf left for the bulk ofthe winter heating season. Total working gas levels are 558 Bcf, or24%, below the five-year average and storage in the EasternConsuming Region is only 56% full. SSB’s models now indicate thatif the remainder of this winter matches the 10-year average, thenstorage levels at the end of March will approach 675 Bcf.

“If January through March is more than 4.5% colder than the 10-yearaverage, then withdrawals are likely to test the 500 Bcf physicallimitation on overall storage levels toward the end of this winter,”the analysts said, echoing recent comments by many other marketobservers (see Daily GPI, Dec. 22).

As a result, the “heat” is likely to remain turned up on gasprices through next summer. SSB’s current forecast shows aquarterly breakout of $6.75/MMBtu in 1Q2001, $4.75/MMBtu in 2Q,$4.25 in 3Q and $4.25 in the forth quarter. The two key variablesare the pace of economic expansion and the growth in domestic gasproduction.

SSB has been relatively optimistic on gas production growthcompared other recent forecasts. It may have to lower itsprojections in light of recent comments made by producers. SSB ispredicting a 5.8% uptick in production in 2001. “However, the viewfrom several companies in the ‘trenches’ is that drillingefficiency has dropped off much more sharply than we have assumed,”Morris and Schmitz said in their report. “In fact, severalcompanies have indicated to us that they believe productionadditions for the most recent 100-250 domestic natural gas rigs isabout one-half of that for the first 500-600 rigs put to workindustry-wide.” Reflecting that view is a recent report by theIndependent Petroleum Association of America projecting productionwill rise by only 1.5% in 2001.

“Perhaps our deliverability projection could prove aggressive,”Morris and Schmitz admitted. “If U.S. GDP growth, on average, in2001 is just 1.25% and domestic natural gas production rises only1.5% this year, then storage levels at the beginning of November,or the traditional start of the storage withdrawal season, arelikely to be no more than 2,600 Bcf, thus portending a potentiallymore dire natural gas price landscape than this season.

“Therefore, we believe that our full-year 2001 composite spotnatural gas forecast of $5.00/MMBtu could still prove conservative.In the meantime, we believe that our $3.75/MMBtu forecast for 2002also reflects a longer-term ‘conservative’ scenario at thisjuncture and could be subject to upward revision depending on howevents transpire during this year and next winter.”

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