Depending on the severity of the coming winter, Raymond James energy analysts are warning that the U.S. natural gas supply may be “rapidly careening” toward a gas shortage, anywhere from 3-10 Bcf/d short of demand. Analysts revised their gas price estimates upward through 2003, and expect prices to reach at least $4.50/Mcf by the first quarter of next year.

In the latest “Stat of the Week,” analysts led by Marshall Adkins predict that the “pending natural gas crisis this winter is more of a supply-driven problem than a demand-driven problem…because supply problems are much more difficult to correct.” The analysts also believe that it is “likely that these higher prices will be much more sustainable through the summer months than they were following the previous natural gas shortage.”

In the fourth quarter of this year, Raymond James analysts predict that gas prices will average $4.00/Mcf, and then move up 50 cents in the first quarter of 2003. Their estimates are higher than the fourth quarter estimates of Henry Hub First Call ($3.55) and Nymex Futures ($3.99), and 75 cents more than their earlier prediction ($3.25). By the first quarter of 2003, analysts believe prices will reach $4.50/Mcf, hover around $4.00 through the second and third quarter, then rise again in the last quarter of 2003 to $4.50 again.

“Although the gas forecast described…represents a higher estimate than any other firm on Wall Street, we remain convinced that these numbers will likely prove to be too low,” said analysts. “In all likelihood, it is the second and third quarter estimates of $3.75/Mcf that could prove to be as much as $1/Mcf too low.”

Noting that the U.S. gas markets have undergone two major “step changes” in the past seven years, analysts said that in both cases, “the step change by was triggered by winter gas demand outpacing available gas supply. As the supply/demand lines crossed, gas prices spiked, gas demand was squeezed out of the system and winter-ending gas storage ended up between 700-800 Bcf. In each case, however, it took a massive shock to the system, i.e., a winter spike in natural gas prices, to convince the gas markets that higher gas prices were, in fact, sustainable.”

In the 10 years before 1995, Raymond James analysts noted that gas prices averaged $1.65/Mcf. During the winter of 1995-96, average gas prices increased 30-40%, hovering around $2.35/Mcf — and they remained there for four years. “The second crisis in the winter 2000-2001 saw another upward spike in gas prices that have driven a three-year average price of around $3.70/Mcf.”

Unfortunately, the analysts believe it is “impossible to predict just how high natural gas prices will go this winter. While we can say with a 90% confidence level [that] the U.S. is likely to experience another natural gas crisis…the weather will dictate just how severe the crisis could get. We do know that gas prices must increase substantially or else the U.S. would end the winter with far less than 700 Bcf in storage.”

Analysts found that while the gas market “always self-corrects by taking prices sufficiently high to eliminate enough demand to rebalance the gas equation,” in this case, the rebalanced equation means “driving gas prices high enough to allow 700-800 Bcf to remain in storage at the end of the winter.”

Regardless of how much supply falls short of demand, Raymond James team noted that “history tells us” that the United States will still end up with at least 700 Bcf in storage. “Surprisingly, the math behind this is fairly simple. All we have to do is look at last winter’s storage withdrawals and estimate how the various year-over-year supply/demand variables will change this upcoming winter.”

Key variables include changes in U.S. gas supply; changes in the economy-driven U.S. gas demand; and changes in weather-driven gas demand. “Of these three variables, we are most confident in our supply estimates and least confident in our weather estimates.” Assuming summer-ending storage is 3,200 Bcf, “normal” weather withdrawals over the winter would be 1,650 Bcf — the six-year U.S. average — putting normal ending storage at 1,000 Bcf.

“Depending on the weather, gas prices must increase enough to kill 3-10 Bcf/d of demand. Unfortunately, the market is not likely to figure this out until we are well into the winter,” said analysts. “If the market figures out and reacts to this shortage situation in mid-December, then it is reasonable to assume that this 1,000 Bcf of demand will be squeezed out of the system in the final 100 days of winter. That means that in a normal weather scenario, the U.S. must see an incredible gas reduction of 10 Bcf/d from January on to allow a balancing of supply/demand by the end of the winter.”

Three weeks ago, in its “September Short-term Energy Outlook,” the Energy Information Administration (EIA) added a penny/Mcf to its outlook for expected average wellhead prices this year (see Daily GPI, Sept. 9). Total demand is expected to be up 3.3% this year to 22.13 Tcf, or about 40 Bcf more than what EIA forecast in August.

“The expected increase in natural gas demand for the coming winter is 12% above the year-ago level. Much of the accumulated cushion in natural gas storage will probably be expended toward feeding consumption growth. While severe price spikes are unlikely, the prospect for continued demand strength for the industrial and power sectors of the economy should lend above-average support to spot natural gas prices.”

EIA added 23 cents to its average wellhead price forecast for 2003 because of expectations for less production and more demand next year than it predicted in its August outlook. “This winter, we expect to see natural gas wellhead prices averaging around $3.20/Mcf, or about $0.80/Mcf above last winter’s price,” EIA said. “For all of 2003, the average natural gas wellhead price is projected to be about $3.28/Mcf compared to $2.80 [this] year.”

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