The end-of-year natural gas price outlook has improved “considerably” over the past month following several “hot” weeks, and the gas storage surplus should begin the final quarter of 2007 with gas storage 60 Bcf lower than year-ago levels and fuel oil prices offering a higher “price umbrella,” an energy consultant said Thursday.

Natchez, MS-based Stephen Smith & Associates raised its natural gas price forecast for 4Q2007 by 55 cents to $7.30/MMBtu (Henry Hub) from an earlier estimate of $6.75 on of the expectation for lower gas storage numbers. The odds, said Smith analysts, favor heating degree days (HDD) in 4Q2007 to be higher than a year ago based on the National Weather Service (NWS) and other weather outlooks. The team raised its full-year 2007 gas price to $6.95/MMBtu from $6.80. For 2008, the price forecast was hiked to $6.95/MMBtu from $6.75.

Smith’s forecast came on the heels of the latest Energy Information Administration (EIA) storage data on Thursday, which indicated that 74 Bcf was injected into storage, matching the five-year average for the week and slightly below last year’s 79 Bcf injection (see Daily GPI, Sept. 28). As of Sept. 21, working gas in storage stood at 3,206 Bcf, according to EIA estimates. Stocks are 37 Bcf less than last year at this time and 238 Bcf above the five-year average of 2,968 Bcf. For the week, the East region injected 44 Bcf, while the Producing and West regions chipped in 20 Bcf and 10 Bcf, respectively.

“The primary driver for this eight-week surplus reduction, as might be expected, was a sequence of unusually hot weather as compared with last year,” or 557 total cooling degree days (CDD) for the last eight weeks versus 488 total CDDs for the corresponding period of last year), the analysts said. For the period from Oct. 5 through Jan. 4, 2008, they used a forecast of 7% lower than normal HDDs to drive their storage projection. The NWS, they noted, expects a warm fall. “Last year had 13% lower HDDs for the corresponding period…” and the data indicate “an early January 2008 storage projection, which is 300 Bcf lower than one year earlier.”

The team assumes that in 4Q2007, HDDs will be 7% below 10-year norms, compared with 4Q2006’s HDDs, which were 13% below 10-year norms. Also, the current price for New York Harbor (NYH) 1% sulfur residual fuel oil was standing at more than $9/MMBtu, compared with an average price of $6.43/MMBtu in 4Q2006.

“Our ‘base case’ price outlook for November bidweek outlook…assumes an environment of $75-85 WTI [West Texas Intermediate] for the next month or two, private weather service projections of CDDs through Oct. 5, 93% of HDD norms for Oct. 6-Nov. 2, and no major hurricane disruptions to gas supply through hurricane season,” analysts stated in a report.

In their assumptions, the analysts estimate a late October gas-to-resid spread in the range of minus $2.00/MMBtu to minus $1.00/MMBtu. At an assumed NYH 1% resid price of $8.75/MMBtu (up 25 cents/MMBtu from two weeks ago) for late October, Smith analysts implied “a likely” November Henry Hub bidweek price range of $6.75-7.75/MMBtu.

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