Noting that some participants in the energy sector might consider his group to be the “perpetual natural gas bulls,” Raymond James & Assoc. analyst Marshall Adkins said the market has proven that “we have, in fact, been overly bearish.” Citing the summer gas storage re-fill problem, Adkins said that Raymond James is once again upping its 2003 gas price forecast from $5/Mcf to $6/Mcf.
The new forecast compares to a $4.40/Mcf Wall Street consensus and a $5.59/Mcf mark for the 2003 natural gas price futures strip.
While many are drawing similarities to the winter gas crisis from two years ago when spot gas prices spiked to $10/Mcf and the 12-month strip surged to $6.50/Mcf, the analyst said he believes “that today’s gas market is far different from the one that existed two years ago.” He noted that the market’s corrective measures quickly dropped prices during the late spring/early summer months in 2001. “Unfortunately, many investors are being duped into believing the price declines this time around will be similar to 2001,” he said.
Adkins argued that the supply/demand fixes that were available two years ago are not there today. The significant swings in three key gas/supply demand variables that solved the imbalance two years are not going to have nearly the impact this time.
Adkins listed the three key supply/demand changes that forced a downward correction in 2001 gas prices as:
Gas cap blow downs created a massive short-term gas supply spike in 2001. The phenomena occurs when gas prices are at a premium over oil prices, inducing well operators that have been pressuring up their oil reservoirs and production with natural gas to change direction and produce the gas.
“The gas price spike two years drove many operators of these large, older oilfields to ‘blow down’ the high-pressure gas caps that have been built up over decades, contributing to a massive spike in U.S. gas supply for a few months in early 2001,” Adkins said. “More importantly for today’s investors, the potential oil reservoirs that could be blown down this year are now gone.”
The obliteration of industrial gas consumption refers to the fact that many industrial customers have not returned as gas customers since prices spiked two years ago. Adkins said new data from the Department of Energy shows that core industrial gas consumption has been cut roughly in half over the past two years. “This core industrial gas consumption fell from around 19 Bcf/day in December of 2000 to only 9 Bcf/day nine months later (August of 2001),” he said. “That means that any changes in the U.S. economy will have a much smaller impact upon the overall U.S. gas demand situation than was the case two years ago.”
On fuel switching, Adkins said “we expect fuel switching to be the one key solution to the chronically under-balanced gas market that we foresee for the next several years. That means that natural gas prices must move meaningfully higher than higher-end distillate products throughout this summer.”
Looking at the gas shortage situation as “chronic” now, Adkins and his group believe the problem should be particularly acute this summer. “If we look at a simple year-over-year gas supply/demand analysis it would suggest that without significant additional gas demand destruction, gas inventories by the end of this summer will be short of ‘full’ by over one thousand Bcf,” he said. “That is a BIG problem.”
However, the analyst expects that the market will react with sufficiently higher natural gas prices to squeeze out around 5 Bcf/d of gas demand throughout the entire summer, getting storage closer to the “full” level of above 3,000 Bcf. Unlike the situation two years ago, Adkins sees it being much harder to kill demand this time around. He noted that the only way to re-balance this summer is for substantial gas to fuel oil switching, which means that if oil prices hold anywhere above $30, gas prices must move back above $6/Mcf though the summer.
“While many Wall Street analysts are getting vertigo with these higher natural gas prices, we are just setting up base camp,” he said. “We believe the fundamentals are in place for several years of sustained higher natural gas prices.”
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