Spot prices continue to languish below $2.20 with some speculators predicting another dip below $2 because of the warm winter and the resulting oversupply situation in storage, but that hasn’t stopped some observers on Wall Street from predicting the sky will be falling again next winter with prices rocketing to unexpected levels and gas in short supply.

Raymond James & Associates analysts said in a research note on Monday that despite record storage levels and near-term bearish psychology in the market, “the U.S. will be in the midst of another full-blown natural gas crisis within the next 12 months.”

“We can all argue about the exact magnitude of year-over-year gas supply changes, the size of the year-over-year industrial demand increases and the impact year over year of weather. If we combine the likely impact of all three, however, our numbers suggest there is a very high probability that gas prices will have to increase sufficiently next winter to squeeze out demand,” Raymond James analysts said.

According to the analysts, the market may not be able to look beyond the current bearish fundamentals in the near term, but prices eventually will make a sharp turn north starting with lower than average storage injections this summer. They predict storage most likely will reach only 3 Tcf by next winter, and as a result, the supply-demand situation should become precarious sooner than expected because of lower production and wellhead deliverability at a time when demand is on the rise again. As a result, they predict storage levels at the end of next winter will fall to record lows of about 400 Bcf unless prices rise high enough (to $4.25 in 4Q2002 and presumably much more in the first quarter of 2003) to drive demand back out of the market.

That “flies in the face of a couple pretty basic issues and the most basic of all is that…storage will be at a record high level [at the beginning of next winter],” said Gregory Shuttlesworth, managing director of PIRA Energy’s natural gas group. He sees inadequate demand this summer to reduce the current record storage surplus. “If you are at a record high [storage] level, you are going to need some exceptionally cold winter weather before you get higher prices. And I would not call higher prices a ‘crisis,'” he added. “If you want to get to prices that are actively discouraging demand and actively encouraging E&P spending, particularly in areas with a short reserve life, that’s a situation we do not see emerging in the second half of this year. I don’t see it happening before the latter stages of the next heating season.”

Wefa Inc. natural gas consultant Ron Denhardt also was somewhat taken aback by the Raymond James & Associates forecast. “I think directionally they are right, but I think they are being extreme in terms of what they said [next] winter-ending inventories are.” Denhardt said Raymond James’ forecast of a 2.5 Bcf/d decrease in supply this year is a stretch. He said although production is falling and wellhead deliverability is in decline, it’s simply too early to foresee a crisis ahead. On the other hand, there are an increasing number of factors pointing in a bullish direction, he admitted.

“I don’t think it’s ridiculous to say that sometime late this year or during the first half of next year prices are really going to ramp up. Right now I’m reluctant to go out and say the sky is falling. Maybe I’ll wait until we see a few cracks in it,” he said.

Denhardt said several factors could lead to such cracks, including a warmer than normal summer (which is the current National Weather Service forecast), significant downtime at large coal-fired power plants due to extensive maintenance requirements preceding the 2003 State Implementation Plan, and creeping demand growth that has been hidden by the warmer than normal winter. A strong economic recovery combined with the right weather could change the picture quickly, he noted.

Shuttlesworth also said that this is the first time in his 20 years of analyzing the gas market at PIRA that there has been such overwhelming optimism about a market recovery at a time of so many bearish fundamentals.

“I don’t ever remember a market where looking beyond a protracted bearish cycle there has been such uniform bullishness with regard to where prices will go beyond that,” he said. “Beyond winter 2002-03, there is tremendous bullishness. That underpins the whole market that we are looking at. It gives people confidence that if they put gas in storage for the next heating season and it turns out to be unusually mild, that it’s not a bad investment because it won’t be too long into 2003 before gas balances will get tight and prices will start moving up into very high territory — perhaps not like we saw in 2000-01 but certainly enough to make those storage injections good investments. We agree with that assessment of 2003…We’ve been saying that to our clients for quite a while now and not raising many eyebrows; they are all expecting that too.”

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