After having one of the more bullish gas price forecasts on Wall Street, Raymond James is changing its tune because there’s a good chance this winter will be one of the warmest in history. The firm said Monday it was lowering its Henry Hub price forecast for the first quarter to $2.30 from $2.75 and its forecast for the second quarter to $2.80 from $3.25. Its forecast for the year was dropped to $3.25 from $3.50, but the firm expects a strong recovery in the last two quarters of 2002.

“Like many times over the past six years, exceptionally warm weather has once again undermined U.S. natural gas demand and temporarily put at bay the pending natural gas crisis,” analysts at Raymond James said in an equity research note.

“It is also important to note that we still anticipate a very robust recovery in natural gas prices in the second half of 2002. In fact we are even bumping up our fourth quarter gas price forecast from $4.00 to $4.25. In Clinton-speak, the answer is simple: ‘It’s the supply, stupid.’ We remain convinced that U.S. natural gas supply is falling much faster than any Street estimates that we’ve seen, and falling much faster than any time that we’ve seen in the past,” said Raymond James analyst J. Marshall Adkins. “Specifically, we believe that U.S. natural gas production this summer will be down more than 5% (or 2.5 Bcf/d) on a year-over-year basis.”

Adkins said the sharply falling rig count and wellhead decline rates are coming together to “create a supply reduction that the gas markets have never seen.” He cites preliminary production statistics (from about two-thirds of domestic producers) for the fourth quarter showing a decline of 1.7% sequentially and 3% compared to 4Q2000. The decline is even sharper (2.7% sequentially) if ExxonMobil is taken out of the mix because of its “squirrelly production numbers.” Furthermore, Adkins notes that Canadian exports are beginning to slack off.

On the demand side, fuel switching is leading to an increase in consumption and a recovering economy should add to that, particularly with attractive $2 gas prices. Raymond James forecasts a 2-3 Bcf/d increase in demand this year compared to last.

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