Warmer weather currently is putting downward pressure on gas prices, but some market observers believe a sudden cold snap could quickly and dramatically change the picture for this winter’s market. Consultants at Wakefield, MA-based Energy Security Analysis Inc. say while a $10 peak is unlikely, $6/MMBtu certainly is possible. However, Tim Evans, futures analyst with IFR Pegasus, believes the market already hit its winter peak, the $4.44/MMBtu reached last week by the December contract.

In its Natural Gas StockWatch, ESAI pointed to the large increase in the number of gas-fired power plants on the market as a continuing bullish factor. Gas demand from independent power producers has increased dramatically this year to a peak of nearly 15 Bcf/d in August. Analysts at Raymond James & Associates are fond of noting that production is down 6% from last year.

However, the sluggish economy and relatively high gas prices have taken a chunk out of industrial demand, ESAI noted. Residential and commercial gas demand also are down 4% and 6%, respectively.

“In short, while we might see a price peak near $6.00/MMBtu before the year’s end, we do not see a $10 winter,” ESAI said. “To the contrary, unless it’s severely cold — a call that we’ll leave to the weather guys — prices are likely to decline sharply at the start of the New Year.”

Tim Evans noted Tuesday that prices already are in decline and are unlikely to return to the levels seen just last week. “Last week was the peak; everybody knows that,” he quipped.

Evans said the reasons include historical price trends, high storage levels, the likelihood that the current weak El Nino will leave the northern market areas warmer than normal, and the continuing impact of the weak economy.

“The vast majority of the time, the high for the winter is set during the fourth quarter when concern about winter supply is at its peak,” said Evans. “Early cold in the market — like we’ve had — also can count more because there’s still plenty of winter to go through. It becomes more difficult to get some level of emotional concern later in the year and into the first quarter. As a result, prices tend to trend lower from November through January.”

The next thing that is likely to prevent prices from returning to the $4.40s is storage. Currently, there is 3,172 Bcf of working gas in storage compared to 2,748 Bcf on Nov. 3, 2000, the peak storage level during the year in which prices rose to their all-time high of $10.10/MMBtu in December.

“We have more storage on hand and we do have an El Nino event in the Pacific, which does normally correlate with a warmer than normal winter in the northern United States,” said Evans. “The economy also is struggling, so there is less industrial demand competing with heating demand. These are limiting factors on how strong prices are likely to be over the course of the winter.”

The odd thing, given the apparently large number of bearish fundamentals, is why prices are so high in the first place. Evans attributes it to “an obsession with year-on-year comparisons,” such as Raymond James & Associates’ note about production being down 6% from last year. “If you think back to 2001, we had a glut of supply. [Raymond James is] creating the impression that we are physically running short, when we are certainly not.

“The rig count may be down 240 rigs from last year — never mind that it’s above average levels.” The year-on-year storage surplus has dwindled to only 40 Bcf, “but it’s still at a record high.”

Evans believes the market became bullish through a long series of tiny steps and the infatuation with year-on-year comparisons. Remember the year-on-year storage surplus was at 1.127 Tcf on Dec. 28, 2001. The slow gradual process of whittling away that surplus, which was totally expected, allowed observers to become a little more bullish with each report, said Evans. The same held true for domestic production, which rose 2.4% last year to 19.45 Tcf, the highest level since gas wellhead decontrol. With every analyst report showing production slightly lower than the prior year, observers became a little more bullish.

“The only way that you can’t say prices are high right now is if you look at that $10.10 record high,” Evans added. “We are less than half of that.”

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