UBS Warburg analyst Ronald J. Barone on Monday raised his Henry Hub gas price forecast for the year to $5.85 from $5.15/MMBtu because of continued low storage levels, deliverability issues and expected strong demand from power generators this summer. But in a separate report analyst Stephen Smith of Stephen Smith Energy Associates said the market appears to be missing the potential for some large storage injections this summer due to demand destruction. Smith sees a need for a downward correction in prices.

Henry Hub prices on Friday were averaging $6.25 and near-month Nymex futures were at $6.50 with a spike to $6.719 in Access trading. Such high price levels reflect a long list of bullish fundamental factors in the market, said Barone: historically low storage levels, high wellhead decline rates, further gas-fired generation additions, incremental growth in gas demand from residential and commercial sectors, higher than normal crude oil prices, an improving economy, and the assumption of normal temperatures.

Barone raised his price forecasts for the year by 70 cents and added another 50 cents to his forecasts for 2004 ($4.50 composite spot) and 2005 ($4.00 composite spot).

“Assuming normal weather and the 9.3 Bcf/d nine-year historical [average injection rate] going forward…from current levels, supplies would approximate 2,631 Bcf by Nov. 1, versus 3,140 Bcf at that time last year and the prior nine-year average of 3,008 Bcf. If this rough calculation yields anywhere near the ultimate outcome, this would suggest a well less than ideal amount of supplies to start the 2003/04 winter heating season even if the economy remains subdued.”

However, analyst Stephen Smith said that the recent cooler than average temperatures have masked the potential for a rapid increase in working gas in storage. “If both [heating and cooling degree days] had been normal for the five weeks through June 6, we estimate that the storage deficit reduction would have averaged 27 Bcf/week rather than the actual 7 Bcf per week (excluding price effects from the likely weaker gas prices),” he said.

“If the June 6 storage deficit reduction comes in at 15 Bcf as we expect, this will be the second consecutive week of meeting or exceeding the target deficit reduction of 15 Bcf per week that is needed to restore storage to normal by Nov. 1.”

Smith said the gas market is “overly bullish” right now. “A freakishly cold May/June effectively masked the strong pace of price induced demand destruction that has been taking place in the industrial/utility sectors.” The market seems to have missed that given normal weather, the current storage injection pace will clearly put working gas at historical averages by the beginning of the winter heating season, he said.

“If the summer remains on the mild side as some weather forecasters expect, we expect the weekly deficit reduction to surprise many by its strong pace. The reason for this, other than the mild summer, would be that $6+ gas is destroying demand at a rate of 3-4 Bcf/d as compared with the $3-4 gas price of a few months back.”

Smith said $5-7 prices were needed to “bid away” the necessary amount of demand to allow storage to be refilled to historical averages by Nov. 1. “We are currently in the upper half of this range, but we expect to see lower prices in the next few weeks.” Smith is forecasting this week’s EIA storage report to show a 106 Bcf injection.

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