Due to cold weather and falling U.S. production, it is likelythat the oil and gas industry will not be able to refill naturalgas storage for the winter of 2001-2002, according to a LehmanBrothers exploration and production update released last week. Thelow storage levels will likely force gas prices higher for aprolonged period of time, the report stated.

The firm expects working gas inventory levels to be at 200-400Bcf at the end of the traditional heating season, compared to thefive-year average of 968 Bcf. Due to this shortfall, the companyexpects that inventories will not be built up to necessary levels,and will be “uncomfortably low” going into next winter. LehmanBrothers forecasts that this will keep natural gas prices peggedhigher going into 2002.

Because of this forecast, the company is raising its 2001 gasprice forecast from $5/MMBtu to $6.25/MMBtu. Likewise, it hasbumped its 2002 price forecast from $4.15/MMBtu to $4.50/MMBtu. Thefirm believes with production dropping almost 7% over the pastthree years, that it is now back at 1990 levels, and probablyreached the bottom of the trough during the third quarter 2000.Unlike many investors who believe production will rise quickly in2001, Lehman Brothers predicts a much slower growth in 2001, a 1-2%increase in 2001. The firm reiterates its “Buy” recommendations onAnadarko, Apache, Devon Energy and Ocean Energy.

The firm offers the theory of “demand destruction” as a possibleway of balancing the sporadic gas market. Demand destruction refersto customers cutting back consumption due to high energy prices.For the fourth quarter, the company estimates heating demandincreased by 564 Bcf compared to the same period during 1999.

The analysts pointed out that the demand growth was not met withsupply growth, but instead came from an additional 301 Bcfwithdrawal from storage along with a 263 Bcf decrease innon-heating consumption due to prices. With a first quarter averageprice of $8-10/MMBtu, it is likely that more demand destructionwill take place.

Alex Steis

©Copyright 2001 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.