In light of yesterday’s 47-cent downward futures correction,PaineWebber may have jumped the gun a bit in raising its Henry Hubprice projections yesterday by about 15 cents for this year andnext to $3.90 and $3.95, respectively. But the investment firmalready is 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 yesterday’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 noted that with the 6 Bcf withdrawal reported this 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. However, with intermediate-termforecasts calling for sustained cool temperatures throughout theNortheast and Midwest (and mild weather influenced year-agowithdrawal comparisons), we could see considerable growth in thedeficit 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…”
The Street consensus now predicts composite spot wellhead prices(which are roughly 15 cents lower than Henry Hub prices) willaverage $3.69 this year (the range of analyst’s predictions isbetween $3.44 and $3.88). PaineWebber’s own prediction is $3.75.The Street consensus on 2001 is that wellhead prices will average$3.62 with a range between $3.05 and $4.35, while PaineWebber nowis projecting an average of $3.80 up from its prior forecast of$3.30. “This increase primarily reflects an updated assessment ofthe season-end storage supplies..”
Salomon Smith Barney raised its spot price forecast in Octoberto a Henry Hub equivalent of $4 for 2000 up from $3.80 andincreased the forecast for 2001 to $4.40 from $3.65. Nothing so farhas convinced Robert Morris, SSB natural gas analyst, to change hisprice predictions.
“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.”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. Thus, we remain quite bullish onthe long-term outlook for natural gas prices and would not besurprised by even higher natural gas prices this winter.”
In the short term, SSB noted in its report, weather forecastsindicate that the vast majority of the United States willexperience an unusual period of below normal temperatures throughThanksgiving, primarily due to the movement of three Arctic airmasses from the Polar regions into the lower 48 states. Mostnotably, the Northeastern United States has just recently begun tofeel the effects of “Old Man Winter,” fueling further concerns ofhigh heating demand in the upcoming months.”
However, the National Weather Service (NWS) yesterday released asix- to 10-day forecast that calls for more normal weather at leastin the West. The latest map shows the area of below normaltemperatures now only east of the Mississippi except for an area inthe Pacific Northwest. The upper Midwest is set to get someabove-normal readings, and the rest of the West now expected to seenormal temperatures, NWS said.
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