In sharp contrast with most of the energy forecasts from a few months ago — which called for a hotter than normal summer — this is likely to be one of the milder summers of the past decade, according to a report by Stephen Smith Energy Associates. The report, issued Wednesday, noted that cooling degree days collectively were 16% lower than normal for the past nine weeks.
“The good news for the ‘gas bulls’ is that the disappointing summer is almost over,” the report noted. “While a 237 Bcf surplus versus 10-year storage norms is large, it is not a catastrophe given recent gas demand trends, and the acceptability of higher-than-historical storage levels that we expect for this fall. Ten-year storage norms simply indicate past storage behavior,” and market conditions can change.
“With the tight gas markets of the past two years, holders of storage are more nervous about having an adequate storage cushion at the Nov. 1 storage peak.” The “pure” historical norm for Nov. 1 storage is 3,030 Bcf, and the Smith report found that buyers probably will require an extra 120 Bcf of cushion, for total of 3,150 Bcf, for the fall target storage peak. “In this context, our current 237 Bcf surplus versus normal is actually only a current surplus of 117 Bcf (237 Bcf less 120 Bcf) with respect to our Nov. 1 target.”
Based on Smith’s gas price models, average Henry Hub prices for the third quarter are forecast at $5.87 MMBtu, with $5.65 for the fourth quarter. Smith also is forecasting a $5.50/MMBtu average price for 2005. “Our conclusion is that we have seen the worst of the summer gas price decline and that Henry Hub prices should level out into a $5.20-5.70 trading range for September and October,” the report said.
Based on its price forecast, the Smith report predicts that “at least for the next four-five weeks,” the exploration and production (E&P) performance index “should resume its 20-month upward trend.” In this environment, said the authors, investors “would be justified using working assumptions of $5+ gas and $30+ West Texas Intermediate at least through 2005 and possibly 2006, with some easing but not a collapse thereafter. On this basis, the E&P sector is still a basic value.”
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