With weather forecasts producing bearish news at every turn andthe national storage reserves looming ever larger, Raymond James& Associates recently published a report projecting spotwellhead gas prices to drop below the $1.50/Mcf level before thebeginning of summer. The study gives the correlation between gasprices and storage levels, the onslaught of gas production, and theeffects of a third warm winter as reasons for its forecast. Thestudy also warns of a gas “price shock” in early 2000, when gasshortages run rampant and production is unable to keep up.

The report says the next few months look bleak. “Unfortunately,if we end up [this] heating season with 1.375 Tcf of gas in storageand U.S. production does not decline substantially, then typicalinjection levels would drive gas storage in October into the 3.5Tcf range. The only problem with this calculation is that there isonly about 3.1 to 3.2 Tcf of available storage.This supply/demandmodel suggests that U.S. natural gas prices could be pushed below$1.50/Mcf, as storage runs out and excess gas floods the spotmarket.” The study indicates this year has been 10.39% warmer thannormal so far. The overall heating season is expected to be 9%above normal.

Along with the foreboding short-term projection, the study alsoindicates the situation’s long-term implications. “Bottom line, ifweather in the winter of 99/2000 returns to normal, we would expectU.S. gas consumption to surge 5% on a year-to-year basis.Unfortunately we believe the supply side of the equation isgetting ready to head downward.”

The study points out that when the criteria is adjusted forthese abnormal temperatures, “real” underlying demand has grown1-3% over the past three years. Assuming a normal 99/2000 winter,the study projects an 8% increase in gas consumption for theheating period. This increase, combined with a flat to smalldecrease in production, will cause a price spike.

“I think it will be similar to the shortages experienced in the1995/96 winter,” said J Marshall Adkins, a Raymond James &Associates spokesman. “Is the Henry Hub going to average doubledigits? No. But many spots will see spikes to the $5.00/Mcf range.”

Confirming the down-before-up projection of Raymond James &Associates is a separate study released by the Energy InformationAdministration (EIA), the statistical branch of the Department ofEnergy. In its Natural Gas Outlook, EIA said spot gas prices wouldnot exceed $2.00/Mcf until the fourth quarter of 1999. Yet, afterthe prices do rise above the $2.00 mark, the EIA said “on aquarterly basis, wellhead prices are not projected to dip below$2.00/Mcf for the entire year.”

PaineWebber, in its research into the natural gas industry, isalso waiting for prices to turn around. It found storage levels toreside in the 2.03 Tcf range as of the end of January, which itsaid is 13% higher than at the same point last year. PaineWebberalso said the U.S. rig count established another record low, as itfell another 26 to stand at 562, compared to 987 at this time in1998. Yet despite the bearish sentiment, PaineWebber still hasfaith. “Admittedly, as a result of very abnormal temperatures, spotprices remain weak and Street psychology with regard to the energypatch remains poor. However.we expect the impact of increasingnatural gas demand and declining deliverability to result in higherprices later this year.”

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