From Dain Rauscher this morning.
This is long, but has a lot of good meat that will refresh your sector view after the long wknd.
DRW INCREASES U.S. GAS PRICE FORECAST FOR 2000 TO $3.35 FROM $2.85
The DRW Energy Group price forecast represents the consensus opinion of
the author and analyst Stephen Smith, Energy Group leader Jim Wicklund, and
other Energy Group analysts John Myers, Mark Easterbrook, and Ray Deacon.
||
|| Natural Gas Prices
||We are changing DRW's spot Henry Hub natural gas price forecast ($ per
Million Btu) as follows:
||
||*Year 2000 Estimate: to $3.35 from $2.85;
||*Year 2001 Estimate: to $3.00 from $2.80;
||*1Q00A: $2.63; 2Q00E: to $3.40 from $2.95; 3Q00E: to $3.70 from $2.90;
4Q00E: to $3.70 from $2.90
||
||Our new gas price forecast of $3.35/$3.00 for the two-year period 2000-
2001, if confirmed in actuality, would represent the strongest two
consecutive years for gas prices ever by a margin of roughly 20%. The best
single year historically was $2.76 in 1996, and the second-best single year
was $2.53 in 1997. The key reason for this stronger forecast is that some
combination of domestic gas production weakness and stronger-than-expected
spring demand has resulted in a sub-par rate of spring inventory build-up.
||
||The exact cause of this slow build-up remains uncertain, but we have
rounded the usual list of suspects. Domestic supply, by our own bottom-up
survey data, was down almost 4% from year-ago levels, and this supply
weakness probably extended into the second quarter. We believe the failure of
GOM shelf gas deliverability is the main culprit, and that this depletion
effect will require more than the 600-plus total gas rigs counts that have
traditionally been able to increase domestic deliverability in times past.
||
||One month ago, we published a survey representing 46% of U.S. gas
production that showed first-quarter production for this sample was down 3.8%
from the year-ago first quarter. This happened despite the fact that the
domestic gas rig count increased from a 410 average for the first half of
1999 to the 600-plus level in October 1999 and has now maintained this 600-
plus level for eight months. Past work that we have done suggests a six- to
nine-month lagged response between a sharp step-up in gas drilling and
subsequent gains in deliverability.
||
||Spring gas demand may also be stronger than normal. Oil prices have
remained in the $25-$30 range. This encourages a high rate of liquids
extraction at gas plants, thus reducing the Btu content of the gas. Early
heat-driven power loads, and start-up of new gas-fired generators has been a
likely gas demand stimulant, along with a high rate of demand-switching from
oil to gas when oil was $25-$30-plus and gas was closer to $3/Mcf. With gas
at $4-plus and WTI at $28-$30 the switching-to-gas incentive will be only
slightly reduced.
||
||AGA gas inventory as of May 17 was 1,218 Bcf, which is approximately 24 Bcf
below the five-year seasonal norm, and 414 Bcf below last year. Over the last
six weeks, inventory has increased at a rate of 4.4 Bcf per day as compared
with a normal 8.2 Bcf per day build-rate for this period. If a gap of this
size continues in the build-rate for the balance of the quarter, we estimate
that AGA storage is likely to end the second quarter at approximately 1,610
Bcf. This would be 190 Bcf below the seasonal norm. The futures market
appears to be already anticipating such an outcome.
||
||We see the current supply/demand tightness extending through 2001 and
probably longer. The central problem is that the traditional ?go to? gas
supply region, the shelf of the Gulf of Mexico, has become very mature and is
now facing gradual production decline. Its role will gradually be replaced
with other North American supply provinces, but total supply is likely to
flatten in the transition period (while demand growth will continue to grow--
demand has been flat due to three near-record mild winters in a row).
||
|| Oil Prices
||We are changing DRW's spot West Texas Intermediate oil price forecast ($
per barrel) as follows:
||
||*Year 2000 Estimate: to $27.00 from $26.00;
||*Year 2001 Estimate: to $23.50 from $23.00;
||*1Q00A: $28.91; 2Q00E: to $27.50 from $26.00; 3Q00E: to $26.50 from $25.00;
4Q00E: to $25.00 from $24.00
||
||Excluding the brief price run-up of the Persian Gulf War, this forecast of
oil prices in the $23.50-$27 for the next 21-24 months, if confirmed in
actuality, would represent the strongest period of sustained oil prices in 15
years (since prior to the oil price crash of 1986). The main reason for the
current increase in our oil price forecast is that OPEC output continues at
levels that will at least maintain OECD oil stocks at a deficit to five-year
seasonal norms.
||
||Based on the most recent IEA report, OECD commercial oil stocks were 2,482
million barrels at year-end 1999. This is 110 million barrels below DRW's
seasonal norm. In the first quarter, the constrained OPEC output effect was
more than offset by weather-related demand weakness. The net effect was to
reduce the shortfall versus the seasonal norm to a 60 million barrel deficit.
If OPEC averages 28.5 million bpd for the last three quarters of 2000, we
estimate that the OECD inventory deficit versus the norm would increase to
more than 100 million barrels again by year-end 2000. OPEC production for
April was only 27.6 million bpd (differs slightly by reporting source), well
below our assumed level of 28.5 million bpd.
||
||Even if OPEC production edges up for the balance of the year, OECD stocks
are likely to stay below five-year norms, and prices are likely to remain
within OPEC's $22-$28 target range (based on OPEC crude basket price, which
is approximately $2.75 below spot WTI). This balance also suggests that
unless OPEC further expands output in the next three to six months, either
formally or by more aggressive cheating than we have already assumed, then we
have not seen the last of $30-plus WTI.
||
|| Engineering A Soft And Politically Sensitive Landing--So Far, So Good:
We expected OPEC to do this expansion cautiously because it would prove far
more expensive to open spigots too far than not far enough. Contracting OPEC
output is usually tougher than expanding it. Aside from the optimum level of
oil price based purely on long-term NPV, the Saudis and Kuwait found
themselves in a politically delicate position. They had to appear to be
somewhat receptive to Clinton's requests while not appearing to jump too
high. DOE secretary Richardson has been telephonically wandering around OPEC
corridors again recently. He stresses that he is clearly not interfering with
their sovereign decision-making authority, but simply urging them to keep an
open mind. They might return the favor by pointing out that recent gasoline
prices, adjusted for inflation, are 27% below 1978 levels.
Stock Opinion
((Potential for ongoing strength in gas prices and oil prices continues to
offer an excellent buying opportunity in the energy complex.)) Each DRW
energy analyst has written a separate note describing his best ideas. My top
three gas-oriented E&P's are EOG Resources (NYSE: EOG; Buy-Aggressive; $31),
Louis Dreyfus Natural Gas (NYSE: LD; Strong Buy-Aggressive, $31), and
Newfield Exploration (NYSE: NFX; Strong Buy-Aggressive, $41). We also have
Strong Buy-Average Risk ratings on Royal Dutch Petroleum (NYSE: RD; $61.00),
ExxonMobil (NYSE: XOM; $81.00), and BP Amoco (NYSE: BPA; $53.00). |
