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Natural Gas Prices High On Cold Weather, Could Match Last Year’s February 3, 2007

Posted by notapundit in US News.
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HOUSTON (Dow Jones)–Having embraced recent cold weather with open arms, natural gas prices have risen steadily since Jan. 1.

Prices could wilt later this winter if inventory levels remain high and not enough cold weather materializes, however, some analysts and traders say if demand is strong, prices could match last year’s or even beat them.

In the short term, prices will likely be determined by how much gas is taken from storage to meet heating demand in the coming weeks, and what remains in storage March 1, at the start of “shoulder season,” when producers once again begin building up inventories.

Some analysts and traders predict average near-month gas futures prices will range between $6.00 a million British thermal units and $8.00/MMBtu, in the short term and perhaps on an annual basis. This compares with an average gas price of $6.99/MMBtu in 2006, $9.01/MMBtu in 2005 – the year of the deadly Gulf Coast hurricanes – and $6.18/MMBtu in 2004, according to analysts.

“If we don’t get two (big) storage withdrawals, you’ll see $6.00 (to the downside) being violated quicker than $8.00 to the upside will,” said George Speicher, a gas trader in Houston with Dow Corp.

Speicher predicted gas prices will range between $6.00 $8.00/MMBtu on a “very short-term basis,” with price swings between 50 cents and $1.00. But if storage operators don’t withdraw large amounts of gas during the next three weeks prices are likely to drop below $6.00/MMBtu by spring, he add.

Front-month March natural gas futures on the New York Mercantile Exchange lost 5.4 cents Friday to close floor trade at $7.476/MMBtu. The price dropped the last two days but remains $1 higher than the beginning of January.

The U.S. began winter with a surplus of gas in storage. After a warm November, December and early January the surplus has grown, relative to the long-term average, from 8.7% Nov. 1, to 21.4% Jan. 29, with stocks now brimming at 2.571 trillion cubic feet, according to the U.S. Energy Information Administration.

Prices, Production

Analysts generally agree that natural gas prices need to stay between $6.00 and $7.00 a million British thermal units for gas exploration and production to remain profitable.

Assuming costs of $3.00 per million cubic feet equivalent, “you need prices to be (at least) $6.00, and closer to $7.00 to break even on a long term basis,” said Carin Dehne Kiley, senior oil and gas analyst with Calyon Securities (USA) Inc. in New York.

“It’s harder to find and replace (gas) production,” she said.

Kiley sees gas prices averaging about $6.75/MMBtu this year, she said, adding that prices in the spring months between winter and summer will rise or fall in line with industrial demand for gas.

The current cold snap has boosted gas demand over the past few weeks, but rising Canadian imports and a glut of liquefied natural gas imports will pressure gas prices lower once the weather warms up, said Citigroup oil and gas exploration and production analyst Gil Yang.

“Weather created a near-term rally,” Yang said. “That doesn’t change concerns which are medium-term secular issues. Those issues are likely to reemerge once the cold weather dissipates.”

Yang estimated gas prices would average about $8.00/MMBtu this year, with an average price of $7.50/MMBtu during the first quarter of 2007.

Canadian gas imports are expected to drop off this year as two of Canada’s largest exploration and production companies scale back drilling programs, analysts said. However, current Canadian gas imports are 20% higher than this time last year, Yang said.

But prices will be tempered by the U.S. being awash in liquefied natural gas due to a warm winter in Europe, he said. Last year, LNG cargoes were being diverted away from the U.S. as the heating fuel fetched higher prices in the U.K. and Spain, which have little gas storage space.

U.S. LNG imports nearly doubled in November 2006 compared to September and October, according to government data.

Stocks Rise, Fall On Gas Prices

Lower gas prices during the fourth quarter of 2006 resulted in at least two large North American drillers scaling back drilling activity. EnCana Corp. (ECA.T) and Talisman Energy Inc. (TLM) both cut 2007 exploration and production budgets.

EnCana shares closed floor trade Friday down 23 cents or 0.5% at $48.19, and Talisman shared closed 4 cents or 0.22% lower at $17.75.

But stock prices for companies with large exposure to North American natural gas reserves were on the rise this week as gas prices rose.

“XTO has done well,” said Robbert Van Batenburg head of research for Louis Capital Markets New York. “Chesapeake definitely has picked up nicely.”

Shares of XTO Energy Inc. (XTO), a Fort-Worth, Texas-based oil and gas exploration and production company were trading around $44 per share at the beginning of January when gas prices were at the lower end of $6.00/MMBtu. Over the past week, as gas demand and prices have increased in line with colder weather and the stock price has increased to trade around $50 per share. Shares of XTO closed floor trade Friday 19 cents or 0.4% higher at $50.47.

Oklahoma City-based Chesapeake Energy Corporation (CHK) is the third-largest independent producer of natural gas in the U.S. with drilling operations in the Barnett Shale, Fayetteville Shale, Permian Basin, and Appalachian Basin, among other regions.

At the beginning of January the company’s stock price was trading around $27.00 per share in line with lower gas prices, relative to this week. The stock price has increased to trade around $29-$30 per share.

Shares of Chesapeake closed floor trade Friday 17 cents or 0.06% down at $29.46.

By Jeanine Prezioso, Dow Jones Newswires

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