Despite record high rig counts, natural gas production is unlikely to add the 1 Tcf in new supplies necessary “to bring some comfort back to the market” this year, PACE Global Energy Services said in predicting gas prices will remain above $5.00 in 2001.

The 1 Tcf is equivalent to annual growth of 5% to 6% in U.S. supplies, “a large year-on-year increase by any stretch,” Pace said in a recent analysis. Noting that prices have fallen off recently from winter highs, Pace said it expected to see further declines in the second quarter. “Yet our proprietary analysis also indicates that price volatility and the attendant risk of a further run-up remains high due to very low inventories and an expected surge in summer demand from new power generation.”

The Fairfax, VA-based consulting firm said the “major uncertainty for the price outlook is the degree of production rebound that will occur this year.” The rig count currently stands at 903, or 541 rigs higher than the low point of 362 in April 1999. “This suggests that a production rebound may be imminent.” But the group also notes “a supply shortfall of 700 to 800 Bcf, and growing powergen demand.” While the higher rig count should add to production, the high decline rates for new wells and pursuit of more marginal production means it will take more wells to counter production declines.

And as always, storage is key. Between 2.2 and 2.6 Tcf must be added during the next seven months to fill storage in preparation for next winter, PACE says. But the industry added only 1.7 Tcf during the 2000 and 1999 refill seasons and 2.0 Tcf in 1998, and “in previous years, storage refills began from a much higher base, usually in the 1 to 1.2 Tcf range.” This year storage bottomed out at 627 Bcf.

It’s a long way back, and refilling storage from the abnormally low level, plus increased demand, add up to “total market requirements for an additional 1,200 to 1,550 Bcf in 2001 and “a major opportunity for gas producers.”

PACE notes, however, that the market dynamics have changed. Last spring LDCs were slow out of the gate in filling storage, opting to ignore supplies at the $4 level and wait for prices to decline later in the season. Coming off last winter, LDCs have seen the error in their ways. Today’s $5 prices look good, and they are filling storage with a vengeance.

Add in new powergen buyers, and new storage tactics, which include cycling in and out to take advantage of arbitrage opportunities, and you have a whole new market scenario which bears close watching. Regardless, PACE believes production will catch up in 2002 and put prices into the $4 range.

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