Forecasts

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.

Bears had their choice of reasons for continuing to push thefutures market lower Thursday: forecasts calling for warmingweather, an unremarkable storage report, and follow-through sellingpressure. And so when the February contract opened more than anickel below Wednesday’s low, the price rout was on yesterday. Thesell-off sent the prompt month 9.5-cents lower to settle at $1.836.

Tuesday’s cash market prices shrugged-off a late plunge on theNymex futures screen on Monday, as they edged upward on hype fromthe first big snowstorm of the season. Most price points added acouple of cents to Monday’s gains as a powerful storm system plowedeastward after tormenting the midsection of the country. Accordingto weather services, several inches of snow accumulated from theDakotas southwestward to Colorado and the mountains of northern NewMexico and Arizona.

Cash prices started the new week on an upward note, largelymotivated by an early Nymex run-up and forecasts of colder weatherfor some major market areas. Except for Northeastern markets, spotprices at most trading points registered gains ranging anywherefrom 1 to 6 cents in the Gulf Coast area to more than 20 cents inCalifornia markets.

A strong cash market and a shift in attention from the bearishsupply situation to the bullish demand forecasts collaboratedThursday to send futures prices spiraling higher. That enabled theDecember contract to move through a couple of key chart levels enroute to its settlement of $2.553. Estimated volume, which has beennotably less than usual this week, registered a respectable 88,159.

Although the power industry has been rocked by sharp pricerun-ups this summer, average real electricity prices are projectedto drop by more than 25% by 2015 largely due to improvedefficiencies and cost reductions brought about by electricityrestructuring, the Gas Research Institute (GRI) said in a new studyissued yesterday.

The American Gas Association released a study yesterday thatforecasts gas consumption growth of 40% by 2015, fueled by strongindustrial demand growth, the dominance of gas-fired generation innew power plant construction and the popularity of gas in new homeand commercial construction. AGA projects gas will expand its shareof the U.S. energy market to 28% in 2015. Consumption is expectedto rise to 31.9 quadrillion Btus (roughly 31 Tcf) from about 22.9quads in 1997.

The Energy Information Administration continues to be bearish ongas wellhead prices this year but expects prices to remain abovethe $2/Mcf mark because of the possibility that temperatures willbe higher than normal this summer and coal delivery problems maypersist in Texas. In its May Short Term Energy Outlook, the EIAsaid it expects wellhead prices to average $2.15/Mcf this year,down 3.6% from the $2.23/Mcf average in 1997.