Natural gas and oil producers are resting at ease as natural gas prices are poised to end 2002 near $5.00/MMBtu and oil prices are clinging to $26/bbl, noted a new report by Standard & Poor’s Ratings Services (S&P). The rating agency raised its gas price forecast last week to $2.75-3.00 (Nymex equivalent), which may appear conservative compared to other forecasts in the $3.60s or higher (EIA) and Nymex highs last week in the $5.30s.

“Further increases in the natural gas pricing assumption are likely in early 2003 as fundamentals remain much more nice than naughty,” said S&P credit analyst Bruce Schwartz in a report, titled “U.S. Energy Commodities: S&P’s Pricing Assumptions For Gas to Rise in 2003.”

On the power market front, the company found that spot power prices in the eastern U.S. generally fluctuated with the natural gas price, which has been volatile in the past few weeks. Despite the unstableness, S&P noted spark spreads were stable and tracked systems’ marginal cost of production. Cold snaps and higher gas prices bolstered power prices throughout the western regions. According to S&P, California on-peak spot prices for November traded in the mid-$40/MWh area, while the Southwest and Northwest regions traded about $5/MWh discount to California.

S&P said it raised its 2003 Nymex gas price forecast due to the recent surge of cold weather and estimated year-over-year production declines of about 5%, which have reduced natural gas inventories. “Inventories now are about 14% below last year and 3% below average — after starting the year more than 20% above each metric,” S&P said in the report. “Strong prices are likely to persist in the near term.”

While some relief from near-term upward pricing pressures may be possible from diminished weather-related demand (see related story this issue), the exploration and production industry remains “stingy” on capital spending as demonstrated by a gas rig count that has barely budged above 700 rigs, the report showed. “Without a significantly increased pace of drilling and normal winter weather, Standard & Poor’s believes natural gas inventories could be reduced to very low levels by the end of the winter of 2003/2004 and cause pricing to spike to a level that rations demand,” the rating agency said.

S&P highlighted the U.S. West Coast as “particularly vulnerable” to price spikes as El Nino weather patterns can reduce hydroelectric capacity. The company said as the heating season progresses and capital programs for 2003 are announced, it is likely to further increase its pricing assumption. However, S&P noted its estimate is unlikely to rise to the current futures price of about $4.60/MMbtu because of the agency’s conservative ratings methodology.

“In the interim, the outlooks of various companies in the E&P industry are likely to be adjusted to reflect the better business outlook; upgrades could follow as companies exploit strong pricing to fortify their businesses and capital structures,” S&P said.

The entire report is available on RatingsDirect, S&P’s web-based credit research and analysis system.

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