Wall Street analysts continue to predict a rapid storage refill this summer and warn of the potential for a significantly bearish reaction in the market in the short-term. Analysts at Salomon Smith Barney (SSB) yesterday reiterated projections earlier in the week by Lehman Brothers that lower demand because of high prices will lead to sharply steeper storage injections this spring.

“Based on our assessment that domestic natural gas production continues to increase combined with the current level of incremental year-over-year fuel switching/plant shut-downs/conservation, but somewhat offset by lower hydro and nuclear supplies, we expect storage injections to initially embark on a pace 2-3 Bcf/d greater than last year, apart from influences due to weather,” analysts at SSB said. “We would also caution that ‘Chicken Little’ may be lurking around the corner waiting to claim that ‘the sky is falling’ when it becomes clear that injections are strongly outpacing last year.”

Storage levels ended the traditional withdrawal season at 620 Bcf compared with 1,031 Bcf last year at the end of March, according to the American Gas Association, which set the stage for increased injections.

SSB analysts still believe, however, that market fundamentals will find a balance and will keep gas prices in the “$4-5/MMBtu range” throughout the summer.”The real test, and perhaps crucial catalyst for E&P stocks, could be the response in natural gas prices to the ‘stress’ that will certainly be exerted on the electric generation grid across the country this summer when temperatures soar.”

There should be a significant increase in reliance on gas-fired power this summer compared to last because of low hydroelectric power availability and maintenance on nuclear plants. SSB analysts forecast 1.5-2.5 Bcf/d more gas demand for generation during the second quarter alone.

However, the analysts predict greater downside risk than upside potential over the next couple of months for E&P shares. The longer-term fundamentals “still bode well with valuations, on average, appearing to reflect no more than $20.00/bbl WTI spot crude and $3.50/MMBtu composite spot natural gas prices, respectively.”

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