Report: Indicators point
to $7 gas this summer

GAS DAILY - Thursday, April 29, 2004

      A mix of bullish ingredients, including an “alarming” decline in gas imports from Canada, should send U.S. gas prices as high as $7/Mcf this summer, analyst Stephen Smith said in a report Wednesday.
      Smith, president of Natchez, Miss.-based Stephen Smith Energy Associates, said an improving economy, surging power generation demand, high oil prices, low hydro levels and reduced imports “appear strongly imbedded and suggest that the tightness of 2004 gas markets could extend into 2005.”
      In his monthly energy outlook, Smith projected an average Henry Hub gas price of $5.55/Mcf this year—up a dime from his March forecast—and said that if the summer is 10% to 15% warmer than normal as some forecasters are predicting, “our best guess would be $6.50 to $7/Mcf for July and August gas under this scenario.”
      “Net Canadian imports for the three-month period ending January 2004 are down an alarming 2 Bcf/day, or 21%, as compared with the corresponding period a year ago,” Smith said. “Most of this decline is due to a sharp reduction in Canadian deliverability,” although increased gas consumption in Canada due to cold weather and economic growth also has played a role.
      As a result, Smith estimates an annual decline of 600,000 Mcf/day in Canadian imports for all of 2004.
      In addition, U.S. production is expected to decline by about 400,000 Mcf/day and liquefied natural gas imports are expected to rise only modestly this year, meaning the United States will have nearly 1 Bcf/day less available gas this year than in 2003, he said.
      At the same time, the analyst said total U.S. gas demand will rise 3.4% in 2004, including a 9.3% jump in gas use for power generation, a 2.5% rise in residential consumption and a 1.7% increase in commercial demand.
      “The net effect should be that the current gas storage surplus should be worked off at a rate of about 15 Bcf/week,” according to Smith. “This pace of surplus storage erosion should be enough to maintain Henry Hub prices near the $5.50/Mcf level.”
      Adding to the bullish sentiment: Hydro levels in the West have been “moderately weaker than last year, and this trend is expected to continue,” driving the demand for gas-fired power generation higher. “We are projecting total 2004 U.S. hydro generation to be 87% of normal,” Smith said.
      While many industry observers have said LNG imports will help ease the supply/demand balance, Smith noted that any substantial increase won’t occur until around 2006, when expansions of existing terminals are completed and some new terminals may come online.
      “The maximum ‘supply shortfall’ is projected to occur in 2006-07. LNG imports ramp up sharply in 2007 and 2008 and the shortfall begins to ease,” he said.
      “The post-2006 surge in LNG imports would begin to ease the upward pressure on gas prices in the 2007-08 period. By 2008 to 2010, we would expect Henry Hub to pull back closer to the $4/Mcf midcycle price that is required to attract new LNG import projects.”
MD