From: researchcapital.com , Peter Linder
We Expect To See NYMEX Gas Price Reach US$3.50 This Summer and US$5.00 Next Winter
• We apparently remain the only ones still bullish on 2002 natural gas prices and we continue to project an average price of
$5.00/Mcf, about 30%-40% higher than street consensus. And we see absolutely no reason to capitulate. On the contrary, we
are convinced more than ever that our gas price call will prove to be correct.
• Our rational supporting this position has not changed. We expect to see a slow but steady recovery in North American gas
demand coupled with an irreversible (this year and likely next year) large and growing decline in gas production. Specifically:
1. Last year’s January-March period was quite mild and the current quarter is forecast to be closer to normal.
2. We expect the weekly U.S. gas storage withdrawal rates to exceed expectations and be consistently way above the
comparable 1Q01 figures. The data for the last two weeks support this thesis. For the week ending January 11, 2002, 137 Bcf was
withdrawn compared to an expected 122 Bcf and last year’s figure of 103 Bcf. For the period of January 21 to March 31, 2001, the
weekly average volume taken out of storage was 76 Bcf. For the same period this year, we project an average rate of 115 –125
Bcf. Therefore, the current huge year-over-year storage gap of 1,070 Bcf should fall by about 500 Bcf to under 600 Bcf. We
project the April 1, 2002 total level to be a much more reasonable 1,200 Bcf. This is approximately equal to the average of the
past five years, excluding last year’s record low figure of under 700 Bcf.
3. Alberta production is already heading lower, with field receipts at just over 11 Bcf/d, which is being compounded by aggressive
Alberta storage withdrawals of about 1 Bcf/d, despite the lack of real winter in much of North America.
4. We expect U.S. gas production to be down this summer by about 3 Bcf/d (total of approximately 50 Bcf/d) and demand to
recover by 3 Bcf/d due to fuel switching and some recovery in industrial demand as a result of low gas prices and economic
recovery. As well, an estimated 30,000–40,000 MW of gas-fired generation (3-4 Bcf/d) is forecast to come on-line this year.
• This spring, we expect to experience the opposite of what happened last spring. Then, gas demand destruction led to an
unexpected quick storage refill, which in turn caused gas prices to collapse. This year, our projected supply destruction
scenario, coupled with increasing demand, will lead to consistently smaller than expected injection rates/higher gas prices.
• Here is a bold call: by next fall, there will be growing concern about the adequacy of the gas supply for next winter, as there
was two years ago. History does repeat itself and, these days, in much shorter cycles. Can US$5.00 gas be far behind? We don’t
think so. The market will quickly discount the current very negative factors regarding gas prices. With much improved market
conditions later this summer and beyond, prices should rise steadily.
• We also believe that we are within 5% of the bottom for the TSE Oil & Gas Producers Index and, therefore, now is an excellent
time to be buying quality producers, especially ahead of our projected gas price rally that should be underway this spring. Our
favorite stocks are Alberta Energy, Canadian Natural, Penn West, Bonavista, Compton, Devlan, Gauntlet, and Ketch. |
