Fitch Ratings last week upped its natural gas and crude oil price forecast for the current year, but it still kept projected prices at a conservative level. The credit rating agency believes gas prices may soften down the road due to near-term industrial demand destruction brought on by the current high prices, and that oil prices may relax by the end of the year if there is a quick resolution to a conflict with Iraq .

It now projects gas prices will average $4.50/Mcf in 2003 and then slide to $3.50/Mcf in 2004, while oil prices will be $27/barrel in the current year and soften to $21/bbl next year.

Fitch, which previously had projected gas prices of $3.75/Mcf for 2003, said it raised its 2003 gas price forecast due to the rapidly dwindling storage levels, the low level of domestic gas drilling activity, and the higher crude prices in the short term that will limit the fuel-switching option for some industrial gas customers.

Nonetheless, “our [projected 2003] price deck is below current strip prices for natural gas…We feel prices still may soften somewhat due to near-term industrial demand destruction caused by present levels of gas prices and an expected softening of crude prices later in the year,” the credit rating agency said. The spot price for gas at the Henry Hub was $7.59/Mcf on Thursday.

The industry exited 2002 with nearly 2.4 Tcf of gas in storage, but Fitch projects the working gas storage level could fall to as low as 600-700 Bcf by the end of this month, which it said “would likely keep a floor price somewhere in the $4 per Mcf range throughout the 2003 injection season.”

Fitch already is preparing for the possibility of the industry beginning the 2003-2004 heating with low gas stocks. If there is a repeat of 2000 injection season, when only a little more than 1.6 Tcf was put in storage, “then the U.S. would enter the 2003-2004 heating season with extremely low inventories (2.2-2.3 Tcf), which would likely cause natural gas prices to be substantially above our ’04 forecast,” it noted.

The amount of gas injected into storage this year will hinge on the level of demand destruction that takes place over the next few months in response to the higher gas prices, Fitch said.

In upping its price forecast for crude oil by $3/bbl in 2003, Fitch cited the market’s jittery reaction to potential war with Iraq, historical low oil inventories worldwide, the still-lingering effects of the Venezuelan oil strike, and strong demand globally for crude in recent months. With crude inventories at 25-year lows and imports to the U.S. below their traditional levels, “it isn’t likely that U.S. crude inventories will return to a normal level anytime soon,” the credit rating agency said.

Nonetheless, Fitch Ratings said it believes a “relatively short, ‘successful’ conflict would bring crude down to the lower $20 per barrel range toward the end of the year.”

On the financial front, Fitch noted it expects “most oil and gas companies will experience excess cash flows [over cash expenditure and dividend requirements] this year allowing them to potentially reduce debt levels and improve their credit profiles.”

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