With natural gas injections exceeding five-year averages by 1.2 Bcf/d over the past two months, “it’s no coincidence that prices have fallen sharply since then, but a gas price floor of $5 still exists given current competing fuel prices,” according to Lehman Brothers’ analyst Tom Driscoll.
In a report issued Friday, Driscoll said prices may need to fall to recapture about 1-2 Bcf/d of demand — unless hurricane-related production shut-ins bail out the market.
“With storage levels more than 150 Bcf above five-year averages, this could lead to further softening in near-term prices,” said Driscoll, noting that Henry Hub spot prices are down around $1/MMBtu over the past two months. “We believe that residual fuel prices put a floor of about $5/MMBtu on natural gas prices, but a sharp drop in oil prices would lower than floor. We appear to be on track to end the season with about 3.2 Tcf of inventory — a level that could be 100 Bcf too high.”
Driscoll noted that gas prices are “likely” to trade between No. 2 and No. 6 residual fuel oil prices if there is no “extraordinary” weather. Since 1998, he said, gas has traded between heating oil and residual fuel about 50% of the time on both the New York Harbor and the Gulf Coast. “Current oil and gas product prices imply that gas should trade between $5.15-8.75/MMBtu,” he said.
“The observations over the past two months indicate that natural gas availability has increased,” Driscoll wrote. “Natural gas markets closely tracked five-year averages for much of the early part of 2004. Beginning in mid-June (perhaps in response to the $6.68/MMBtu bid-week price for June gas) we began to observe rising relative injection rates.”
After adjusting for weather, Driscoll noted that the injection rates of the past eight weeks indicate that the “gas market has gone from being balanced (using five-year averages as our definition of balanced) to 1.2 Bcf/d over supplied. Lower prices may be required to correct the oversupply.
Lehman’s fine-tuned its 4Q2004 oil price forecast upward by 40 cents to $33.30/bbl to reflect the actual price, and “to allow us to maintain a full-year average oil price of $36/bbl.” Lehman’s is maintaining its $30/bbl forecast for 2005. Henry Hub natural gas price estimates remain $6/MMBtu for 2004 and $5/MMBtu in 2005.
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