In light of last Thursday’s 47-cent downward futures correctionand new winter forecasts by the National Weather Service,PaineWebber may have jumped the gun a bit in raising its Henry Hubprice projections late last week by about 15 cents for this yearand next to $3.90 and $3.95, respectively. But the investment firmalready was playing catch-up to Salomon Smith Barney (SSB) and therest of the bullish bunch on Wall Street.

With “limited deliverability” this winter, lower than averagestorage levels, expected normal temperatures and growing demand,”the industry is poised for one heck of a winter,” PaineWebberanalyst Ronald J. Barone said in his industry research note, whichcame out prior to Thursday’s price collapse on Nymex. “Moreover,there is a growing likelihood that this season will culminate withApril 1, 2001 storage supplies worn down to less than ideal levels,leading the industry to be thrown back on the injection treadmillfor an even more challenging run than the one just ended.”

Barone certainly is not the lone bull on the Street. The currentStreet consensus now has composite spot wellhead prices (which areroughly 15 cents lower than Henry Hub prices) averaging $3.69 thisyear (the range of analyst’s predictions is between $3.44 and$3.88). PaineWebber’s own prediction is $3.75. The Street consensuson 2001 is that wellhead prices will average $3.62 with a rangebetween $3.05 and $4.35, while PaineWebber now is projecting anaverage of $3.80 up from its prior forecast of $3.30. “Thisincrease primarily reflects an updated assessment of the season-endstorage supplies..”

Barone noted that with the 6 Bcf withdrawal reported last weekby the American Gas Association, the year-over-year storage deficitgrew to 274 Bcf from 259 Bcf in the prior week. “Looking ahead withcooler temperatures arriving in key regions this week (along with a20 Bcf withdrawal comparison), we would not expect to see asignificant change in the year-over-year deficit picture upon therelease of the next storage report,” he said last Wednesday.”However, with intermediate-term forecasts calling for sustainedcool temperatures throughout the Northeast and Midwest (and mildweather influenced year-ago withdrawal comparisons), we could seeconsiderable growth in the deficit as the year winds down.”

The six-year average of winter storage withdrawals is 97 Bcf perweek and there are three much warmer than normal winters embeddedin that average. If the industry maintains that rate this winter,storage will be reduced to about 810 Bcf on April 1, 2001, whichcompares to 1,031 last April, 1,337 in 1998 and a prior six-yearaverage of 999 Bcf, Barone noted. “When adjusting for these [warmerthan normal weather years] and other factors, we preliminarilyproject April 1, 2001 [working gas levels] at 600-700 Bcf…..”

Robert Morris of Salomon Smith Barney (SSB) said in his researchnote last week that he also expected the storage situation to getworse. “With temperatures looking to stay at or below the 10-yearaverage for the next several weeks, even a continued upswing indeliverability would be insufficient to halt the slide inyear-over-year storage levels, which now stand 274 Bcf, or 9%,below last year at this juncture,” he said in his weekly report,which came out prior to the new bearish weather forecasts.”Nonetheless, even another record-warm winter would still leavestorage levels only slightly ahead of where they stood this year atthe end of the withdrawal season while a normal winter could renderan even tighter market next year,” Morris said. “Thus, we remainquite bullish on the long-term outlook for natural gas prices andwould not be surprised by even higher natural gas prices thiswinter.” SSB raised its spot price forecast in October to a HenryHub equivalent of $4 for 2000 up from $3.80 and increased theforecast for 2001 to $4.40 from $3.65.

However, these outlooks may now contain some false assumptions.According to the National Weather Service’s latest six- to 10-dayforecasts, more normal weather (warmer) is coming at least in theWest. The latest map shows the area of below normal temperaturesonly east of the Mississippi except for an area in the PacificNorthwest and Rocky Mountain regions. The upper Midwest is set toget some above-normal readings, and the rest of the West nowexpected to see normal temperatures, NWS said.

Furthermore, the NWS also updated its long-term seasonalforecasts late last week, showing a high likelihood of above normaltemperatures for nearly the entire southern half of the countrythis winter. Probabilities were inconclusive for the northern half,however.

Rocco Canonica

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