Analysts at Raymond James & Associates took a double-blade axe to their natural gas price forecast for the rest of the year, chopping an entire dollar off the prices they are expecting to see in the third and fourth quarters. They based the change on the likelihood that gas prices will crash when the full level of storage is reached well before the end of the injection season.

In April, analyst Marshal Adkins raised his price forecast because it appeared gas production was falling more rapidly than expected and the economy was in the early stages of a recovery that would push up consumption. While production is down about 6% compared to last year, current storage information from the Energy Information Administration indicates that gas consumption is way down, even compared to last year’s depressed levels, Adkins said.

“If we assume that the weekly [EIA] gas storage data is correct (that could be a big stretch), it is becoming increasingly evident that U.S. natural gas storage could simply fill up too early in the injection season. In this case a premature fill could potentially cause a natural gas price collapse in the September/October time frame,” said Adkins. “Accordingly, we are lowering our third quarter natural gas price forecast from $3.75 to $2.75 and our fourth quarter gas price forecast from $4.25 to $3.25.” Barring a hurricane, Adkins said prices could easily “tank” into the low $2.00s this fall, he added.

He said current demand is down about 2 Bcf/d and could lead to storage ending the injection season at or above 3,200 Bcf, the historical full level. If that happens, there will be significant competition between stored and wellhead gas, which will drive prices down.

However, Adkins expects 2003 prices to be even higher than previously expected. The sharp drilling decline combined with next winter’s easy weather comparisons with the extremely warm weather last winter should lead to a gas supply shortage scenario. He predicts next winter the gas market could be 6-7 Bcf/d tighter than the prior winter because of the supply decrease and demand rise. As a result, Adkins raised his 2003 price forecast a quarter to $4/MMBtu from $3.75.

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