US gas prices to crater

Two more analysts call for US gas prices to crater this summer
Washington (Platts)--25May2006Two more US energy analysts predicted Thursday that weather-driven demand
won't absorb the large amount of natural gas in storage and that prices will have to fall to $5/MMBtu or less before the market corrects itself. "As new evidence of stretched storage capacity surfaces, gas futures will likely will likely be subject to continued downward pressure, until prices become low enough to cause power generators to switch from coal to natural gas," Fimat analyst Antoine Halff said Thursday. As recently as Wednesday, Southern Natural Gas said it was limiting storage injections at its facilities in Louisiana and Mississippi as its facilities approached 74% of capacity with three months to go in the injection season. RBC Capital Markets analyst Joseph Allman said he expects storage and pipeline curtailments to increase as the summer goes on. Most shut-ins by producers will be involuntary as pressure rises in the storage and pipeline infrastructure and gas can't get out of the ground without expensive compression, he said. Allman believes gas prices will drop another $1 to $1.50/MMBtu--the June NYMEX gas futures contract was trading around $5.94/MMBtu at midday EDT Thursday -- and could hit $4/MMBtu this summer in reaction to the oversupply of gas in storage. "We think the natural gas market will self-correct in a few ways," Allman said. "But the primary fix results from the limited physical capacity of the system. Pressures will build in the storage and pipeline system, involuntarily shutting in production. This phenomenon will occur in stages and, of all factors, put the biggest dent into the gas storage surplus." By July, Allman believes 1% of US production will be involuntarily shut-in by high system pressures, a total he expects to grow to 5% by October. The producers that will be shut-in first, and the most, Allman said, are those with interruptible contracts, but he expects firm contracts to be rationed by the fall. "A few producers told us that they have already curtailed a small amount of production due to pipeline pressure issues, three to four months earlier than usual. We have heard reports of some storage facilities being nearly full already and of pipeline operators warning customers over the next two months their systems will be full," Allman said. He called for NYMEX futures prices to hit their trough in August just before the peak of the hurricane season, dropping to $4.50/MMBtu, with wellhead prices getting even lower in some regions, the Rocky Mountains, in particular.