Due to its assertion that natural gas demand has not rebounded with the arrival of lower prices and remains 8 Bcf/d less than year-ago levels, Lehman Brothers lowered its 2001 benchmark natural gas price forecast Tuesday for the second time in a month from $5.75 to $5.00/MMBtu.

Lehman Brothers energy analyst Thomas Driscoll believes gas has only reclaimed a “small share of the demand” that was lost in December and January to energy conservation, alternative fuel sources and industrial production cuts. The firm said that the demand loss has been “masked” by the cold weather experienced nationally this year that resulted in increased heating. The real signs of weaker demand will become evident within the next two months, Driscoll said.

The firm predicts that storage injections could be 6-9 Bcf/d greater than last year’s levels during the months of April and May, leading to the elimination of the current year-over-year deficit of 360 Bcf, unless prices fall enough to let demand recover sharply. Lehman Brothers said it believes that this year is going to be the opposite of 2000, and expects that the market is “set up for a sharp gas price drop.” The Lehman report was released before the American Gas Association announced on Wednesday that 49 Bcf was pulled from the ground on March 28, which expanded the year-over-year deficit to 404 Bcf.

“A continuation of recent demand patterns throughout the refill season would leave inventories at well in excess of 3,000 Bcf on October 31,” Lehman Brothers said. “We do not believe that inventories far above this traditional season-ending storage level of roughly 3,000 will be achieved; we expect gas prices to fall enough to restore natural gas demand. This is the reason for the decrease in our gas price forecast.”

Tim Evans of IFR Pegasus said he was very skeptical of Lehman Brothers’ forecast. He said it was “at odds with conventional wisdom,” but “if they are right, they are geniuses.”

“How rational would it be to expect [the year-over-year storage deficit] to completely disappear over a two-month period”” Evans said. “So right off of the bat it is a tall order. My thinking here is that you have to walk before you run.” If you look at “withdrawals over the past four weeks or so, you’ll see that we are not making that much net fluctuation in the deficit.” For the week that ended Feb. 2, the deficit was 426 Bcf, only 22 Bcf greater than the current 404 Bcf mark, Evans pointed out.

“So you have taken off 22 Bcf over the past nine weeks, and now they say you’re going to erase 360 Bcf over the next nine weeks; I don’t know about that,” Evans said. “This would be a wonderful call on their part if it happened to be true because there is nothing in the flow of the data yet that would indicate that we are about to see this kind of a change in the rate of injection. Particularly when you would expect to see the flow into storage return to an average level from last year’s low level as sort of an intermediate step, a transition to actually injecting into storage at a possible record high rate.”

Also in its report, Lehman Brothers said it expects increased demand for natural gas due to power generation to add no more than 2-4 Bcf/d, and possibly much less depending on the weather and economy. Other than localized price spikes due to hot summer days, Lehman Brothers does not expect for there to be sustained high gas prices this summer as a result of power demand increases.

The company said with prices coming down, and storage working itself out of a deficit, it expects that exploration and production share prices could fall by 10-20% by the end of the second quarter. As a result, the firm lowered its ratings on Anadarko Petroleum, Apache Corp., Devon Energy and EOG Resources from “strong buy” to “buy.”

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