Last month I said the U.S. natural gas market would be hell for a while. What's been happening in the market since then seems to prove that out. Talk about price and demand elasticity-I feel that I've been on a trajectory as if I was on the end of a rubber band that was stretched to its limit and then let go. Ironies abound. Two weeks after Spencer Abraham called the natural gas summit, where everyone from producers to end-users to gas consultants cited data proving a shortage, record amounts of gas were injected into storage. "It's now time to acknowledge full gas storage on November 1...gas storage operators are determined to inject, and recent fuel-switching and price-induced demand destruction has facilitated this process," said Greg McMichael of A.G. Edwards. Bob Gillon of John S. Herold Inc. was so kind as to point out, in a recent report, that for 12 consecutive weeks, injections into U.S. gas storage were above the average for each of those weeks. "Twelve weeks in a row is not a statistical fluke," he said, warning that high gas prices are not sustainable-given the loss of about 4 billion cubic feet a day of fuel-switched demand-unless the weather heats up or economic growth speeds up, which appears unlikely. "Barring an unusually hot summer, we will enter the winter season with more than 3 trillion cubic feet (Tcf) of gas inventories." So much for a gas supply crisis-at least for now. At press time, the forward curve on the Nymex was lower than current prices, for the first time in several months. From June 15 to July 15, prices fell a total of about a dollar per thousand cubic feet (Mcf) or 20%, to around $5. This was despite the greater public visibility of the "gas crisis" story in the national media after the summit, and after Federal Reserve Chairman Alan Greenspan mentioned the crisis before Senate and House hearings. And more to the point, it was ironic. Why? The fall in gas prices occurred even though we had hot weather, a few hurricane-related curtailments and very high oil prices-all factors that bulls normally cite when they predict gas prices will remain high, points out E&P analyst Subash Chandra of Morgan Keegan & Co. This is disturbing. If the typical bull signposts no longer automatically lead to high gas prices, or end up not mattering as much due to new market psychology or other overlooked factors, then a price decline is in the cards. It doesn't help that two key agencies are injecting confusion into the discussion. The Energy Information Administration revised downward its 2002 industrial demand numbers 9% and cut its gas price forecast for 2004 by 13%, not to mention that it frequently revises the weekly U.S. storage data for which it is responsible. Industrial demand, which is very sensitive to the price of gas, represents about 30% of the total U.S. gas demand, down from previous estimates of 35% to 40%, says McMichael, if the EIA numbers are correct. Then the National Oceanic Atmospheric Administration changed its methodology in calculating degree days, also a measure of gas consumption. NOAA says it now appears that last winter was colder than normal, when we all thought it was warmer than normal. These challenging discrepancies that make forecasting a real challenge were pointed out by Raymond James analyst Marshall Adkins, who is sticking to his guns on high gas prices-certainly at least $5 and likely closer to $6. The question becomes, how low can gas prices go now, and for how long? Has all the demand that would be expected to disappear done so, or is there more attrition to come? Analysts are going every which way to predict the near-term outlook on this one, while the domestic gas-rig count goes up and weekly storage injections continue to be higher than prior-year numbers. "We see summer gas prices falling under $4 per Mcf as summer cooling season concludes in August. Winter gas prices could be capped at $5.25 based on a 25% premium to parity with the residual fuel-oil forward price-the premium would increase only if weather is colder than normal or we fail to reach 'normal' inventories of gas by November 1," Chandra says. He also believes "a steady march to normal inventories is possible by October 31, an eventuality not considered in the euphoria surrounding the sector." In early July analyst Bob Morris with Banc of America Securities downgraded the entire natural gas sector he follows. His colleague Jim Wicklund, however, who covers the service sector, thinks that even if we end up with close to 3 Tcf in storage, that still won't be enough to meet demand and gas prices will be healthy. McMichael, who says both the EIA and the market are overreacting to storage data, thinks gas will stay in the $4 to $6 range through 2004.