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Gas prices to fall Analysts predict drop to $3.50-$4 on storage build, faltering demand Petroleum News
After a year of robust natural gas prices, some industry analysts are looking for prices to fall over the coming months, barring an unusually cold winter in the United States. The forecast is based largely on a rapid build in storage and waning demand for gas due to the robust price environment.
Prices could trough in the range of $3.50 to $4 per thousand cubic feet, said Stephen Smith of Stephen Smith Energy Associates.
“We really can’t count on weather being abnormal, and no one is forecasting a hideously cold fall,” Smith said. “That means if you have a chronic surplus ... it’s going to eliminate the (storage) deficit.”
Smith, who closely tracks gas storage, figures a deficit that stood at around 390 billion cubic feet in early April already has been eliminated and that surpluses are here and on the rise.
“The many permanent Wall Street gas bulls which confidently projected that there was no way that normal storage targets could be met by Nov. 1 are bloody but unbowed — and now equally certain that cold weather and declining supply will lead to another round of $6 plus gas prices this winter,” he said. Lehman Brothers lowered targets for gas prices Lehman Brothers is one Wall Street firm that recently changed its tune, lowering both its targets for natural gas prices and downgrading the shares of gas-leveraged exploration and production independents.
The investment bank noted in a report to investors that gas injections of 2.2 trillion cubic feet so far this refill season are 40 percent greater than last year's level, adding that storage should “catch up with historical averages” by mid-October. The firm said the increased injection rates are being caused by weak industrial and perhaps utility demand. Prices have averaged $5.50 this year compared to $3.04 for the first 10 months of 2002.
“It appears that a sustained period of high prices has had a very negative impact on demand,” Lehman analyst Thomas Driscoll said in a report to investors.
Though Lehman does not expect gas prices to fall back to the $2 level, as they did in late 2001 following extraordinarily high prices the preceding winter, the firm is predicting that prices will drop below $4 and possibly approach the $3 level this winter.
“We are disappointed by the relatively modest natural gas prices that have prevailed over the past two months despite the need to inject large quantities of gas into storage,” Driscoll said.
Lehman also lowered its 2004 gas price forecast by 50 cents to $3.75 and its 2005 forecast by 25 cents to $3.75. Ratings of gas-weighted firms downgraded Because of “our fear” that prices will fall this winter, Lehman last week also downgraded ratings on the shares of several large gas-weighted exploration and production companies, including Burlington Resources, EOG Resources, Devon Energy and EnCana.
In Burlington's case, Lehman lowered its sights on the company despite its own forecast calling for strong production growth of 8 to 9 percent in 2004 and 4 to 5 percent in 2005. The firm noted that Burlington is one of the most gas-weighted producers with nearly 70 percent of its production consisting of North American natural gas.
“Although we believe that long term investors in (Burlington) will be rewarded given the company's strong balance sheet and high-quality asset base, near term weakness may prevail given our outlook on natural gas prices,” Lehman said. It was a similar story for fellow North American gas titans EOG, Devon and EnCana.
However, Lehman decided to raise its rating on Talisman Energy to reflect both the company's improved near-term production outlook and Lehman's “shift away from North American gas leveraged names.” Only 35 percent of Talisman's production is North American gas.
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