Fitch Ratings on Friday raised its previous oil and gas price estimates for the year, predicting natural gas prices will stabilize at $2.50/Mcf, and move to $2.75/Mcf in ’03, as production slowly creeps up toward the end of ’02. However, Fitch analyst Sean Sexton warned that the strip prices for gas still “may soften somewhat” with storage expected to be high through the year. “We estimate that currently, there is still half the gas in storage for next year…filling won’t be a problem even if demand comes back a little quicker.”

In a half-hour teleconference on the worldwide energy sector, Fitch analysts with its Oil & Gas Group separately discussed the upstream and downstream markets, both for the United States and worldwide. The Venezuelan political crisis, which saw the ouster of the president Thursday, commanded the most attention, however, and analysts scheduled another teleconference to focus on South America in the coming days.

Sexton, who focused on the U.S. upstream market, reported that natural gas also has seen a price rise in the past few weeks because “non-related weather related demand has been somewhat stronger than expected.” However, he said it was “no coincidence” that both natural gas and crude oil prices both began a price run-up at about the same time.

Regarding Fitch’s natural gas forecast through ’03, Sexton said, “market perceptions are such that because of the current storage levels,” there has not been a push to continue production at the same pace as last year, and it is “no longer economic” for producers to ramp up drilling. However, Sexton said that while “rigs are not drilling in the U.S.,” the rig count both on land and offshore in the Gulf of Mexico “won’t go much lower,” but will be too strong through the rest of the year.

In its drilling forecast, analyst Patrick McGeever said a “weakness in both natural gas and oil has caused a pull-back, particularly in natural gas drilling.” Concern about the U.S. economy, and the unstable situation in Argentina and Venezuela has “further aggravated” the reduction, he added. Baker Hughes, which monitors rig counts, reports they are 9% lower in the first quarter than they were in the fourth quarter, said McGeever, which, given the concerns and lower commodity prices, was “not entirely unexpected.”

“The demand for oil services has weakened, but the outlook is stable,” said McGeever, but cautioned that the agency would “closely monitor the rig counts and other determinations of activity to determine if ratings actions are necessary.”

As far as the financial outlook for the upstream market, McGeever said that “after two to three quarters of refinance, Fitch expects the pace of this issuance to slow” as interest rates rise and there is less demand for “short-term paper.” McGeever said most upstream companies had already reduced their capital budgets for the year, and now “will find it unnecessary” to seek short-term capital because most have strong internal cash flows after the record production levels of 00 and 01.

Fitch raised its previous crude oil forecast in the short term to $21.50/bbl, but Sexton added that “concerns may subside” if political tensions ease. For ’03, Fitch’s oil forecast is $20/bbl. Referring to the Middle East and the unknown factors facing the marketplace there and in South America, Sexton added, “we’re stating the obvious, there’s a war premium on crude.”

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