The continuing plunge in temperatures may help deplete some of the natural gas storage glut, but if the temperatures rise in the next couple of weeks, three energy consultants last week said working gas levels in storage may finish the season hovering around 1.7 Tcf or more. Barring production shut-ins from hurricanes and assuming normal weather patterns, one analyst said the storage glut may pressure gas prices through the rest of 2007.

On Friday, Natchez, MS-based energy consultant Stephen Smith revised his season-ending projection down from 1.7 Bcf because of the continuing cold weather.

“The two weeks ending Feb.16 are currently expected to average a combined 20-25% more heating degree days (HDD) than normal,” Smith told NGI. “If this holds, and then we see 10-year HDD norms through the end of March, then we would look for 1,550 Bcf at March 31 — still high by historical norms but much better than it could have been.

“On a gas-heating weighted basis the HDD for week ending Feb. 9 [could] be the coldest week of the last five years,” Smith said.

In his monthly report issued at the end of January, Smith had projected storage levels would end at about 1.7 Bcf at the end of March, which would be 828 Bcf over 10-year norms and 19 Bcf higher than last year. His projections were based on 10-year HDD norms from Friday (Feb. 2) through the end of March. “If HDDs were to be 10% lower than normal, then the projected end of March storage level would be 1,918 Bcf.”

Smith’s “base-case” gas price outlook still assumes oil prices ranging between $50 and $65/bbl for West Texas Intermediate (WTI) through 2007, minimal production shut-ins from hurricanes, and 10-year weather norms for the rest of the year (after using specific HDD/cooling-degree-day forecasts for the two weeks ending Feb. 2).

“The price outlook envisions a significant storage surplus for the rest of 2007,” Smith said. “As a result, Henry Hub is likely to sell at a discount to 1% sulfur New York Heating residual fuel oil from March through October.”

Smith expects gas prices will now average $6.15/MMBtu (Henry Hub) in 2007, down 25 cents from a previous forecast of $6.40/MMBtu. Prices were revised to $5.35 from $5.65 in 2Q2007; to $6.15 from $6.60 in 3Q2007; and to $6.80 from $7.05 in 4Q2007. In 2008, Smith now expects prices to average $6.35/MMBtu, down from a previous estimate of $6.60. The 2009 gas price was revised to $6.40 from $6.55, and in 2010 the price was revised to $6.40 from $6.45.

“While winter finally arrived, 10 short weeks is all that remains of the natural gas withdrawal season,” wrote C.K. Cooper & Co.’s Philip J. McPherson, director of research. “We continue to believe that natural gas is heading back to the December lows of approximately $6.00/Mcf. Simply stated, there is just too much gas in storage.”

McPherson said if winter continues to remain cold and the average weekly withdrawals are met, storage would still finish this season at April 2002 levels (1,492 Bcf), when gas prices were below $4/Mcfe. He advised investors to use the recent strength in gas-weighted issues to reposition toward “a more oil-weighted energy portfolio,” or companies with “zero correlation to U.S. natural gas prices.”

John Gerdes of SunTrust Robinson Humphrey/the Gerdes Group also expects storage levels to be high at the end of the season, but he was more optimistic in his outlook for prices.

Gerdes said current weather forecasts “continue to paint a bullish near-term picture, and the lack of a strong gas price response is likely attributable to traders looking past the current weather cycle toward an expectation of mild conditions in mid February.” He noted that for the current week the National Oceanic Atmospheric Administration is forecasting 221 total degree days (TDD), which is 5% higher sequentially and 14% above the long-term average.

With a minimum of two to three greater-than-average storage withdrawals in upcoming weeks, “inventories exiting the heating season should approximate 1,700 Bcf, roughly the same as last year,” Gerdes noted. However, “even exiting the heating season with +1,700 Bcf in storage, supply-side adjustments appear likely to support stronger gas prices over the next 12-18 months.”

Gerdes’ forecast on Friday reiterated his expectation that oil prices through 2007 will average $61/bbl WTI, while gas will average $7.44/MMBtu.

The gas price, Gerdes said, “should enable growth in industrial gas demand as well as the gas supply necessary to satisfy higher value space heating/power generation demand, while providing the [exploration and production] E&P industry a price that stabilizes U.S. gs drilling and limits the deterioration in Canadian gas well completions. Notably, our gas price assumes recent 10-year average weather, recognizes the current elevated level of gas in storage and the potential unwinding of fuel switching evidenced in ’06 that favored burning gas over residual fuel oil.”

Oil prices below $60/bbl would “provide a significant price advantage to burning residual fuel oil over natural gas,” Gerdes wrote. “Notably, over the past six months in a +$7 price environment, our analysis suggests industrial demand recovered 1+ Bcf/d year-over-year. The recovery in industrial gas demand is a blend of high-gas-price comparisons associated with hurricane-disrupted supply and genuinely stronger industrial demand in a lower gas price environment.”

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