Even though it says “accurate and precise prediction of commodity prices is futile,” Simmons & Co. International nevertheless makes a stab at it, increasing its natural gas price forecast for 2002 from $2.25/Mcf to $2.90/Mcf, in line with a rise in the forecast for crude oil from $21 a barrel to just over $24 a barrel.

“Modeling E&P companies requires a price forecast, regardless of the uncertainties in the current volatile market,” the Houston-based investment analysis firm said in its latest research report released last week. The only thing certain for natural gas is continued volatility, but based on its rising projection of oil prices, Simmons predicts natural gas prices will tag along in 2002 despite the large amount of gas in storage. “Strong crude oil prices have provided (and will continue to provide) support for natural gas prices.”

The analyst group bases continued higher oil prices on expectations of a global demand recovery in the second half of the year, continued OPEC cohesion and the “event risk” posed by the Middle East and Venezuela. The firm’s “belief is that the current ‘risk premium’ is likely to keep oil prices in the mid-$20s/bbl until the underlying fundamentals take effect (i.e., demand growth). Nevertheless, given the uncertainty the crude oil price “could easily be $5/bbl higher or lower in 2003” than its $25/bbl forecast.

For 2003, natural gas prices could strike out on their own, hitting $3.30 based on fundamentals, such as declining production and increasing demand for power generation and to support an economic rebound. In addition, the Simmons group said the “realization that external supply sources (Canadian and LNG imports) will not add sufficient supplies in the next few years to meet normalized demand growth” will weigh in.

“The fundamental question is the pace and magnitude of the production decline as we roll through 2002,” Simmons said. It forecasts U.S. natural gas production growth will decline about 3% through the remainder of the year. Contributing to supply will be Canadian imports that grow by about 500 MMcf/d or 5%, but that will be partially offset by lower LNG imports in response to lower prices. Also, LNG shipments “were significantly reduced” during 4Q01 and 1Q02 because of post-Sept. 11 safety concerns.

The analyst group noted, however, that higher or lower production numbers will impact the price, and “we are carefully monitoring monthly Texas gas production data, quarterly E&P production reports, and aggregate U.S. NGL production.”

The $2.90/Mcf price for 2002 is the base case, with the high and low cases spanning a range between $2.40 and $3.40. Given a plus or minus 50/cent range on either side of the base case, the range for 2003 would be between $2.80 and $3.80/Mcf.

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