With January natural gas futures prices up $1.412 in just five days of trading as the near-month contract soared to $6.337 on Thursday, Lehman Brothers analysts quickly stowed their bear claws and slapped on a set of bull’s horns. Analyst Thomas Driscoll questioned the causes of the run-up in prices but wasn’t hesitant to raise his gas price forecast by 75 cents to $4.50/MMBtu next year. He also tacked on 50 cents to his forecast for 2005, raising it to $4.25 from $3.75.

“The bear call that we made in early October was based on our observation that storage rates over the summer were running 3-5 Bcf/d above historic averages,” Driscoll said in an equity research note. “This high rate of storage injections implied that either supply was strong or natural gas demand was weak (perhaps as a result of high prices leading to reduced consumption).

“Over the past several weeks injection/withdrawal behavior has turned dramatically more bullish. Net withdrawals/injections over the past four weeks imply to us that the market is balanced — that is a 3-5 Bcf/d improvement versus the summer data. This improvement may be related to decreased LNG imports, continued declines in U.S. production, recovering industrial demand and a changed seasonal demand pattern where the markets are more sensitive to weather and winter heating demand.”

As a result, Driscoll said he was raising his stock ratings on Burlington Resources, Devon Energy and EOG Resources. Lehman Brothers analyst Jeffrey Robertson raised his ratings on Chesapeake Energy, Westport Resources and Newfield Exploration.

“On average we are raising our 2004 discretionary cash flow per share estimates by 13% and price target by 7% to reflect our revised gas price outlook,” Robertson said.

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