At press time, the price of natural gas on the New York Mercantile Exchange had topped the important psychological barrier of $3 per thousand cubic feet, but many investors, producers and analysts were wondering why. Most people figured this price wouldn't last long. After all, the amount of gas in storage was around 1,700 billion cubic feet, nearly twice what it was a year ago at this time and at the top of the five-year range. What's more, the strength and timing of the coming U.S. economic recovery (aka gas demand growth) were still much in doubt. Boston-based consulting firm Energy Security Analysis Inc. warned its clients about falling into the bull trap. "Focusing on the three major drivers of marginal demand-weather, electric output and fuel switching-ESAI fails to see strong signals that justify recent prices...there may be a fear in the marketplace that supply has begun to tighten along side dropping rig counts...however this element does not explain all of the price strength in cash and prompt-month markets." But even the cautious ESAI, like most analysts, thinks gas prices will head up later in the year, even if prices appear to have moved up too soon and are not sustainable through the second quarter. "The impact of shrinking gas availability, combined with what economists expect to be a reviving economy in the second half, will begin to push gas prices up by the third quarter." Natural gas analysts at Simmons & Co. International, Houston, and at Salomon Smith Barney in New York, lowered their 2002 gas price estimate, citing the high gas storage factor. Both firms forecast an average $2.25 per thousand cubic feet for the year, as opposed to the rosier Nymex price of $3 on March 15. "We believe the record surplus in storage will continue to put pressure on gas prices and drilling activity in the near term," said a Salomon report. "We expect the rig count to continue dropping by 10 rigs per week for the next three or four months." By mid-March, the U.S. gas rig count had fallen to about 600, some 33% off last year's pace. Analyst Geoff Kieburtz thinks the count will bottom near 500 by midyear before recovering in the second half. "We are lowering our full-year forecast average [for gas rigs] to 615 from 670 previously, and compared to an average 937 in 2001." Supply and demand uncertainties Simmons forecasts gas demand of 61.6 billion cubic feet per day this year, which, although above the level experienced in 2001, would be below the 62.4 Bcf per day recorded in 2000. Overall gas demand from power generation will increase by up to 2 Bcf per day over the next two years, Simmons says, despite the impact of capacity creep from coal-fired sources and competition from lower-cost fuels such as nuclear and hydro. Optimists cite the 41,000 megawatts of new gas-fired generating capacity that came online in 2001. Only counting projects already under construction, not merely announced, another 100,000 MW will come online by the end of 2003, Simmons says. Pessimists counter that gas-fired capacity is coming on at a record pace and will soon create, if it hasn't already, a supply glut that is made worse by falling demand for power as the economy has slowed down. ESAI analyst Mary Menino believes most drilling will focus on exploration to build reserves, rather than on development that leads to immediate production increases. Simmons estimates wellhead gas production will have declined 1% in the first quarter once all data are in, and 3% over the rest of 2002. It also anticipates forced well shut-ins in the third quarter to keep storage below 3.2 trillion cubic feet. The deepwater Gulf of Mexico will start to add about 1 billion cubic feet of new gas production to the grand total by year-end. The Nansen-Boomvang, King Kong and Canyon Express fields account for 900 million cubic feet of that additional gas. This may offset the effects of the rig count decline now occurring onshore. -Leslie Haines