In the last four months of 2006, between Sept. 1 and Dec. 29, there were 11.2% fewer heating degree days (HDD) than normal, and the first two weeks of the new year are expected to be 18% warmer-than-normal, lowering the odds for a “normal” cold winter and higher natural gas prices, Stephen Smith Energy Associates noted in a monthly forecast.

The Natchez, MS-based energy consultant said the gas storage surplus is “likely” to be in the range of 750-800 Bcf by mid-January, with winter-to-date HDDs 12.5% below normal.

“The year 2007 is shaping up to have a storage glut, which is similar to 2006,” Smith noted.

The energy consultant now projects a gas storage surplus of 714 Bcf (versus 10-year norms) for Dec. 29, compared with a storage surplus of 423 Bcf on Nov. 3 — an increase of 291 Bcf in just eight weeks. Smith is forecasting a gas storage level of 1,491 Bcf by the end of March, which is about 600 Bcf above 10-year norms and 200 Bcf lower than a year ago.

“This is premised, however, on normal weather from mid-January through the end of March — a radical departure from the classic El Nino winter that has prevailed thus far.” To date, the HDDs for most of this winter “have been well below seasonal norms,” and the storage surplus “will be close to 800 Bcf by mid-January if this weather outlook is accurate.”

Mid-January is within one week of reaching the halfway mark for the winter heating season.

“The positive gas-to-resid spreads, which characterized the eight weeks through mid-December, reflected the possibility of a normally cold winter. For the last two weeks, however, negative gas-to-resid spreads have returned,” the forecast said.

Smith’s previous gas price outlook assumed 10-year weather norms and a West Texas Intermediate oil price of $55-65/bbl through 2007. However, with the warmer-than-expected winter to date, the energy consultant has lowered his 2007 Henry Hub bidweek average forecast to $6.40/Mcf from $6.75/Mcf.

For 1Q2007, Smith expects gas prices to average around $6.25/Mcf, down from a previous forecast of $7.60/Mcf. He also dropped the forecasted 2Q2007 price by 20 cents, to $5.65/Mcf from $5.85. He maintained his forecasted 3Q2007 price at $6.60/Mcf, and he raised the 4Q2007 price to $7.05/Mcf from $6.90/Mcf.

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