Many investors and analysts assume gas storage levels will reach a record 3.9 Tcf at the end of October, and the surplus storage has led to forecasts of gas falling to the $4 range. Gerdes, an analyst with SunTrust Robinson Humphrey/The Gerdes Group, expects prices to remain low, but he doesn't see a huge drop from current prices.
"Given the storage surplus, recovery in hurricane-impacted gas production (10% of production permanently lost) and acceleration in [liquefied natural gas] LNG imports, gas prices likely need to remain below $6/MMBtu for several months to induce sufficient growth in industrial gas demand to prevent production curtailments," said Gerdes.
"Production curtailments may occur with elevated transportation system line pressure due to gas storage limitations entering the heating-season (estimated storage capacity: 3400-3500 Bcf). Notably, solid growth in coal/nuclear generation and last summer's 10% hotter than average weather should moderate gas-fired power generation growth."
Last winter's weak gas demand, which was partly attributable to a 4% warmer-than-normal heating season, growth in coal and nuclear power generation, acceleration in LNG imports in the last half of 2006 and gas storage limits "suggest a decline in gas prices this year...to induce a 2.5 Bcf/d (17%) year-over-year recovery in industrial gas demand," Gerdes noted. "Notably, the potential for materially disruptive hurricane activity remains an upside catalyst for gas prices."
Gerdes' 3Q2006 gas price forecast is $5.75/MMBtu, which he said "is supported by the need to induce sufficient growth in industrial gas demand to prevent production curtailments due to gas storage limits entering the heating season. Our stronger 4Q2006 gas price of $7.25/MMBtu recognizes the recalibration of market fundamentals upon entering the heating season."
In 2007 and 2008, "stronger growth in gas-fired power generation and modest supply growth imply a higher average gas price ($8/MMBtu) to rationalize industrial gas demand and permit growth in high value gas-fired generation," Gerdes wrote. "After 2008, strong LNG import growth should allow for necessary growth in gas-fired power and permit modest growth in industrial natural gas demand."
Last Monday, Raymond James analysts, who have remained bullish as gas prices have fallen, said the resurgence of price-sensitive demand through fuel switching, liquids stripping and what may prove to be "gas on gas" competition at current price levels could translate into a bottom for natural gas prices in the $6/Mcf area, well above the market's perceived $4-$5 range (see Daily GPI, June 13).
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