UBS Warburg analyst Ronald J. Barone added 25-65 cents/MMBtu to his natural gas price projections for 2003, 2004 and 2005 on Tuesday, citing 10 bullish factors, including steep declines in wellhead deliverability, higher crude oil prices, an improving economy and expectations for normal temperatures.

Barone also said he expects supply/demand tightness this year to lead to significant price volatility, the magnitude of which will be determined in part by crude oil prices and the weather. “However, if there was one lesson learned during the late 2000/early 2001 price run-up, it is that extreme price spikes will be short-lived,” he said.

“That is — whether driven by the real-time passing along of prices to industrial users or media reports/lagged pricing affecting residential and commercial consumption patterns — we believe price movements well north of $5/MMBtu will cause significant demand destruction that will quickly work to recalibrate the market.” When prices shot to $10 in December 2000, a substantial amount of gas demand was forced out of the market. At the time, some analysts and market experts estimated that up to 6 Bcf/d of demand from industrial users was lost (see Daily GPI, May 11, 2001).

Barone said he expects Henry Hub gas prices to average $4.15 this year (up from his prior projection of $3.50), $3.90 next year (up from $3.40) and $3.65 in 2005 (up from $3.40). The current market strength, he noted, stems from already high wellhead deliverability decline rates, continued gas demand growth from gas-fired power generation and the residential and commercial sectors, high crude oil prices and the “spillover effects of reduced bilateral market liquidity from weakened energy merchants.”

“With spot prices hovering near $4.50 and storage supplies at a 95 Bcf deficit relative to five-year averages, we are compelled to rethink our long-standing $3.35/MMBtu 2003 composite [wellhead price] projection,” Barone said. He said the factors for raising his price projections include the following:

Barone noted that his price forecast for 2003 is about 50 cents higher than the current Wall Street consensus. However, analysts at Raymond James & Associates are predicting that prices will average $5/MMBtu at the Henry Hub this year. In comparison, the Energy Information Administration is projecting $3.69, and Standard & Poor’s Ratings Service is forecasting only $3.00 (see Daily GPI, Dec. 24, 2002). The 12-month strip of gas futures prices (February 2003 through February 2004) on the New York Mercantile Exchange on Monday was $4.74/MMBtu.

There is no Wall Street consensus for 2004 or 2005, however. Barone said his expectation that prices will fall from 2003 levels going forward is based on expected increases in gas production in reaction to the high 2003 prices. “The decline also reflects the assumption of a lower crude pricing environment (which should yield more firm fuel switching to crude) and increase in LNG imports — albeit nothing dramatic given the long lead time on new infrastructure development,” he said.

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