Another analyst reduces natural gas price forecast

July 6, 2001
With US supplies of natural gas increasing in the face of "lost demand," Salomon Smith Barney Inc. reduced its forecast of composite spot prices to $3.25/MMBtu through 2002 from a previous range of $3.75-$4.50/MMBtu.

HOUSTON, July 6 -- With US supplies of natural gas increasing in the face of "lost demand," Salomon Smith Barney Inc. reduced its forecast of composite spot prices to $3.25/MMBtu through 2002 from a previous range of $3.75-$4.50/MMBtu.

"While we continue to foresee at least 3.5% domestic natural gas production growth this year, it is the demand side of the equation that has prompted us to lower our sights on natural gas prices through next year," said Robert Morris, one of the brokerage firm's chief analysts, in a report issued late Thursday.

It marked the second rollback of natural gas price estimates by financial analysts within a week. On June 29, Simmons & Co. International, Houston, reduced its price projections to $3.50/Mcf from $4/Mcf previously.

Earlier this week, Raymond James & Associates Inc. refigured its third quarter projections for oil prices to $25/bbl from $28/bbl; and its 2002 forecast to $26/bbl from $30/bbl.

Salomon Smith Barney previously had expected natural gas prices to average $3.75/MMBtu during the third quarter of this year, rising to $4.50/MMBtu in the fourth quarter, and sustaining around $3.75/MMBtu through 2002. But if the industry continues refilling underground storage facilities at the current rapid rate, Morris said, "It appears very likely that natural gas storage levels will reach 3.1 tcf and perhaps approach 'full' capacity of nearly 3.3 tcf at the beginning of November."

In that case, he said, "Natural gas prices are not likely to be much above $3/MMBtu this fall and, in the worst-case scenario, could approach $2.50/MMBtu."

The American Gas Association reported 105 bcf of natural gas was injected into US underground storage facilities last week, down from 108 bcf the previous week but up significantly from injections of 69 bcf during the same period over the last 2 years.

US gas storage now stands at 1.8 tcf, or 186 bcf more than at the same time a year ago.

Injections of gas into US underground storage have averaged 4 bcfd over the last 6 weeks, pushing gas prices below both distillates and fuel oil, said Morris. Yet the industry "has not made any more ground" in recouping markets lost to those alternative fuels a year ago when gas prices were climbing, he said.

"We estimate that roughly 1.5 bcfd of this higher pace of injections can be attributed to fuel switching that has still not returned to natural gas for various reasons," Morris said.

Some former industrial customers might want to be sure natural gas prices aren't likely to spike again before going to the trouble and expense to switch back to that fuel, while others may still be obligated to fuel oil contracts that have not expired, he said.

Barring a collapse in oil prices, the gas industry eventually should get back that market, Morris said.

However, he attributed another 1.5 bcfd of "lost demand" to "cutbacks in the more manufacturing-intensive industries, from computer equipment and consumer products to paper and automobiles, as well as conservation throughout all commercial and industrial sectors." US industrial production has spiraled down for 8 consecutive months -- "the longest decline in almost 2 decades," Morris noted.

With Canadian gas imports recently running 1 bcfd ahead of last year's supplies, he said, "There would appear to be at least 2 bcfd available for injections over last year that is not going to vanish, absent a sudden turnaround in the economy or an extended heat wave across the country."

Despite the rollback in demand, Morris said, "We remain steadfast in our assessment that domestic natural gas production will be up at least 3.5% this year over 2000. During the third quarter, we expect production to be up around 2 bcfd, which should more than offset the anticipated increase in demand from new power generation facilities."

That's even allowing for a sharp drop in rig efficiency to 10 MMcfd of additional production for each of the last 250 rigs put to work, down from average production additions of 22 MMcfd/rig in 1999, he said.

Simmons & Co. analysts earlier predicted that a drop in natural gas prices to $3.50/Mcf would slash producers' earnings by 20%, forcing them to postpone some drilling programs that would impact the oilfield service sector even harder through next year (OGJ Online, June 29, 2001).

They envision earnings reductions of 10-15% among the largest international multi-services companies to as much as 50% for some North American offshore and land drilling contractors.

However, they said a fall-off in drilling activity would quickly reduce US gas production, bringing supplies in line with demand, which could then outstrip supplies again.

Even with an anticipated decline in the number of rigs drilling for gas, Morris said, "We expect natural gas production in 2002 to increase nearly 2%, or 1 bcfd."

But if the US economy is back on its feet by then, Morris said, that added production "could fail to match the rise in demand."

Over the last 2 years, Raymond James & Associates maintained one of the most bullish price outlooks for benchmark US oil among Wall Street analysts. However, analyst Marshall Adkins reported Monday, "It is now becoming apparent to us that deterioration of global oil demand growth has been even more severe than we had originally thought."

He said, "If we exclude the impact of first quarter fuel switching in North America, it now appears that global oil demand growth will amount to only 600,000-700,00 b/d, or a 0.9% year-over-year increase. This slowing demand growth has allowed US petroleum inventories to post an exceptional 40-million-plus bbl build through the second quarter to nearly 650 million bbl."

At current inventory levels, oil should be trading in the low $20/bbl range, he said.

Salomon Smith Barney is maintaining its price projection for benchmark US oil at $22/bbl through 2001 and beyond. However, Morris reported Friday that prices could average in the mid-$20/bbl level or higher for the rest of this year if members of the Organization of Petroleum Exporting Countries maintain their current discipline.

Contact Sam Fletcher at [email protected]