FERGUSON'S FORECAST: Rich Incentives for Exploration

Gas prices continue to show impressive strength, with the September contract closing Tuesday at $8.38/ MMBtu and the 12-month strip at $8.70. The suggestion I made a few months ago that prices could reach $10 this year no longer seems like much of a stretch. Gas prices continue to be buoyed by oil, which seems content to hover around $60 per barrel, but gas fundamentals remain bullish as well. USEIA data through May show year-to-date U.S. production continuing to fall by about 100 billion cubic feet (?1.2 percent) despite an astounding 27 percent increase in the number of gas wells drilled. Total supplies managed to remain flat, however, as additional imports from Canada offset the decline in U.S. production and increased exports to Mexico. Fortunately, U.S. consumption declined in the first five months of 2005 compared to last year by 160 Bcf (?1.5 percent). This decline was entirely due to milder winter weather this year, which reduced gas demand for heating by about 200 Bcf. Other demand increased, presumably because of increased industrial activity as the economy continues to show strength. I expect that data through July will show an increase in consumption for the first seven months, however. Because of the warm summer weather this June and July, my model shows that about 200 Bcf more gas has been burned so far this summer to generate power for air conditioning. Levels of gas in storage have dropped accordingly. The outlook for consumers continues to be gloomy - I expect prices to remain strong and perhaps increase further. Current prices have provided rich incentives for exploration, as drilling activity shows. The tax subsidies provided by Congress in the recently passed energy bill are additional pork gravy for producers that will not increase production or lower prices. The legislation is an insult to taxpaying consumers already hurt by high prices.

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FERGUSON’S FORECAST: Rich Incentives for Exploration

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