The normally bullish Raymond James energy team on Monday reduced its 4Q2006 natural gas price forecast by $2, to $5.75/Mcf from $7.75, based on the “significant bearish shift” in gas storage injections. However, it held its 2007 forecast at $10/Mcf.

The Energy Information Administration (EIA) last week estimated a maximum U.S. working gas storage capacity of 3,593 Bcf, and working gas levels just days ago were above 3 Tcf (see Daily GPI, Sept. 20). Based on the EIA estimate, the industry only needs to inject 63.6 Bcf a week into storage to reach a 100% level by the official start of the heating season Nov. 3. Last Thursday, the EIA reported 93 Bcf was injected into storage (see Daily GPI, Sept. 22). October gas futures ended last week at $4.627/Mcf, (see Daily GPI, Sept. 25). Early Monday, gas futures were called down another 24 cents to $4.39. The October contract expires this Wednesday.

According to Raymond James energy analyst J. Marshall Adkins, the increased storage injections on a weather-adjusted basis suggest the U.S. gas supply/demand equation “has miraculously changed from being 2 Bcf/d tighter versus last year to suddenly 3 Bcf/d looser versus last year. In other words, these recent storage injections suggest that either gas demand has fallen by up to 5 Bcf/d and/or gas supply has increased by up to 5 Bcf/d just in the past few weeks.”

The large injections, said Adkins, “have clearly created a much more bearish short-term outlook for natural gas prices. We have seven weeks left in the summer injection period, and storage is already pushing close to 3.2 Tcf. Given our view of limited gas storage capacity, it now appears that localized market ‘gas on gas’ competition may depress U.S. natural gas prices for at least the next few months until a lot of the surplus spot gas is mopped up (or helped by involuntary production curtailment at the wellhead due to higher pipeline pressures).”

Raymond James also reduced its 4Q2006 oil forecast to $62/bbl from $68 based on the recent drop in oil prices. It is estimating 2007 oil prices will be around $70/bbl.

“For us, the key to 2007 natural gas prices will be exactly how much gas we can actually store this summer,” said Adkins. “If maximum storage is 3.5 Tcf, then 2007 gas prices are likely to trend back toward $10/Mcf. If storage capacity is closer to 3.8 Tcf, then 2007 gas prices will look much uglier than we are currently forecasting. Unfortunately, it does not appear that anyone really has a clue about the actual maximum capacity limitations of U.S. natural gas storage.”

Adkins noted storage capacity estimates by the experts range from a low of 3,400 Bcf to a high of 4,000 Bcf. To better understand “true” summer-ending storage capacity, Adkins considered different methodologies used by the EIA and set an estimate for storage capacity at 3,500 Bcf.

“While we recognize the potential for error in estimating actual gas storage capacities, we think it makes more sense to rely upon actual gas storage peaks rather than theoretical peaks,” said Adkins. “The 3,367 Bcf noncoincidental regional peaks achieved in 2004 and 2005 are probably the best place to start. If we add a 50 to 150 Bcf ‘fudge factor’ to these actuals, then storage capacity would stand at around 3,450 Bcf to 3,500 Bcf. The fudge factor would account for 1) the unprecedented financial incentive to store gas (or the price contango between the near month and winter month gas contracts), and 2) the fact that some salt dome storage capacity has been added over the past few years. Accordingly, our best guess at full storage capacity is around 3,500 Bcf.”

Adkins said the “ending-summer gas storage level attained at Oct. 31 will have a defining effect on the winter-ending storage level in April of 2007. Simply put, if maximum storage capacity turns out to be 3.5 Tcf (assuming normal winter weather), we project that the market will start the next summer injection season with 1.3 Tcf.

“While our estimate of 1.3 Tcf of winter ending storage is higher than the long-term average of almost 1.2 Tcf, it would be meaningfully lower than the 1.7 Tcf where we ended last season. Given that 1.3 Tcf would be well below recent seasonal highs, gas prices would likely work their way back toward a 7:1 or 8:1 ratio with crude prices. In other words, we think the gas market would be tight enough to support natural gas prices back up into the $8 to $12 per Mcf range (assuming crude averages around $70 per barrel).”

However, if maximum capacity is 3.7-4.0 Tcf, “we would then have to concede that average gas prices in 2007 would be significantly lower than our current estimates.”

In a note to clients on Monday, energy analyst John Gerdes of SunTrust Robinson Humphrey/The Gerdes Group said “gas market fundamentals are looking increasingly bleak over the next couple months as a confluence of events suggest the market will remain oversupplied in the near term. While not officially over, some forecasters are stating that the hurricane season is practically finished, leaving Gulf of Mexico producers unscathed. Mild weather continues to persist nationwide and is likely to result in further larger than average storage injections.”

Spot market prices in the Rocky Mountains last week fell below $2/Mcf at some hubs, “leading some producers to publicly express consideration for shutting in production,” Gerdes noted. The EIA storage capacity estimate of at least 3.6 Tcf could mean that “volumes approaching these levels are likely to encounter significant line pressure, which would restrict actual volumes in storage. With approximately seven more injections expected during the remainder of the cooling season, storage levels are likely to bump up against these constraints.”

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