Last week marked the second consecutive week of warmer than normal temperatures and the tenth overall this heating season, forcing UBS Warburg analyst Ronald Barone to concede his forecast for a $2.10/MMBtu average spot wellhead price this quarter could be a little too high. He also said his forecasts for the year may have to come down and other analysts agreed the fundamental picture continues to look weak despite the drilling decline.

“Though we have strongly factored in the weak economy and elasticity of demand into our 2002 forecast of composite spot prices, the recent bout of substantially warmer-than-normal temperatures could send our near-term assumptions…’under water,'” Barone said.

Heating season temperatures this winter so far have been 17% warmer than normal and 26% warmer than last year. The East has been warmest with Mid-Atlantic temperatures 18% warmer than normal, the Northeast 16% warmer and the Midwest 15% warmer than normal, while the West has been slightly cooler than average: Rockies (3% cooler) and West Coast 7% colder than normal.

Meanwhile, the storage surplus compared to last year is still above 1 Tcf. With the latest withdrawal, working gas levels stand at 1,036 Bcf higher than at the same time last year.

“Given the mild overall conditions this week (along with the 128 Bcf year-ago withdrawal comparison), we would expect and increase (albeit modest) in the surplus next week,” said Barone. Further out, unless temperatures are ridiculously mild, we are likely to see modest declines in the surplus, given the next three withdrawal comparisons of 105, 95 and 81 Bcf.

“At this point, if one were to apply the average seven-year historical weekly withdrawal rate of 88 Bcf going forward, April 1, 2002 storage supplies would approximate 1,499 Bcf versus the prior seven-year April 1 average of 946 Bcf.”

Several other uncontrollable factors could “render our outer-month assumptions high,” Barone added. These include the possibility of a larger than expected storage surplus on April 1 due to the continuation of mild temperatures, the possibility of significant “demand dragging effects” from an El Nino; and the possibility for above average hydro electric conditions in the West.

Wall Street consensus estimates on 2002 spot wellhead prices rage between $2.36 and $3.50 with $2.74 being the average.

Lehman Brothers analyst Thomas Driscoll said earlier this week he believes working gas is on track to end winter at 1,440 Bcf. “This overhang is likely to lead to falling prices over the remainder of the winter,” he said. “We think that there is a 50-75% chance that gas prices will fall to $1.75-$2.00/MMBtu over the next 4-6 weeks. A price level of less than $2 could lead to a further 10-15% decline in E&P share prices.”

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