Salomon Smith Barney (SSB) said in a weekly E&P report that it expects gas storage injections to continue to strongly outpace last year and consequently put further downward pressure on gas prices in the near-term. Over the long-term, however, SSB expects current underlying supply/demand dynamics will balance out in a price range of $4 to $5/MMBtu.

“The bigger factor currently is the level of ‘backed out’ demand which we estimate to be around 4-to-5 Bcf/d, while domestic production is estimated to be up at least 1.25 Bcf/d versus last year,” SSB said in its report, referring to lost demand due to high gas prices.

Regarding first quarter gas production levels, SSB said 27 of the 40 largest producers, representing 66.6% of total U.S. gas production, show production was up higher than expected. “Interestingly, actual numbers plus estimates for this group reflect a year-over-year increase in domestic natural gas production of 2.7% and a sequential uptick of 2.1%,” the report stated. “At this juncture, these figures are ahead of our models which ultimately yield a full-year uptick of 3.0%.”

The real test for the share prices of exploration and production companies will occur this summer, SSB stated, when natural gas prices respond to the “stress that will be exerted on the electric generation grid across the country when temperatures soar, although natural gas storage levels cannot be overlooked at that juncture if the year-over-year deficit continues to shrink.”

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