Understanding the US natural gas market is tougher than ever.

Raymond James & Associates Inc., Houston, Monday cut its third quarter forecast to $2.75/Mcf from $3.25/Mcf, its fourth quarter estimate to $2.50/Mcf from $3.50/Mcf, and for the full year 2002 to $3.50/Mcf from $4/Mcf.

In an investment note, chief gas analyst Marshall Adkins said, “We cannot remember a time when there has been less visibility on all the fundamental gas price drivers.” Over the past several months, gas storage injections have indicated there is 5-6 bcfd more gas in the US system than at the same time last year.

Given lagging data, it is impossible to determine exactly which supply/demand variables have changed to drive this year-over-year change, Adkins said. Raymond James’s “best guess” suggested about one-third of the problem is supply related, while about two-thirds is demand related.

In any case, he said, it is becoming clear the anticipated boost in gas-fired summer power demand is “simply not showing up,” making the runway “just too short for summer gas prices to lift off.”

Regardless of whether the year-over-year change is supply or demand related, Raymond James projected the US will reach near full storage capacity well before the normal end of the injection season. This could mean a substantial amount of gas will be looking for a home in October, creating gas-on-gas competition that is “likely to drive cash market prices down through the floor,” Adkins said. He said the outlook is about the same for November and December, as unfavorable year-over-year weather comparisons make demand increases highly unlikely.

Earlier, the investment banking firm predicted demand would slump, then “whipsaw” back in mid-summer when 40,000 Mw of new electric generating capacity was scheduled to begin operating, soaking up about 5 bcfd of gas. Now, Raymond James said the incremental increase is more likely to be about 1 bcfd.

But Adkins cautioned the actual summer change in natural gas-fired electric demand could range from an increase of more than 3 bcfd to a decrease of 1 bcfd. Adkins said he is more inclined to believe falling demand is largely responsible for the gas glut, but “unfortunately, we can’t prove it.”

He is estimating total gas supply will rise about 2 bcfd in the second half of 2001, but the increase could range between 1 bcfd and 4 bcfd. Short-term, gas demand is in the hands of industrial users and plants that switched to other fuels when gas prices shot through the roof last year.

If prices continue to fall, Adkins said fuel switching will begin to favor returning to gas and demand will likely improve 1-2 bcfd on a year-over-over basis. While harder to nail down because reliable statistics aren’t available, Adkins estimated industrial consumption fell 2 bcfd or about 10% on an annual basis.

“For now, we are assuming that this industrial-related demand for natural gas remains depressed at current levels,” he said, although comparisons between this year and last should begin to improve to flat to up by year end.