As I write this on a balmy day in May, the Northeast independent power system operator has asked all consumers in the region to reduce electricity use because of a fear of rolling brownouts. Rumors say that a large Houston gas and power trader-marketer paid as much as $8,000 per megawatt hour for power the week of May 8. And it isn't even August yet. Meanwhile, U.S. gas storage levels are still about 25% below where they were last year at this time, and gas prices are at a two-and-a-half-year high. Says Deutsche Bank Alex. Brown global research analyst Adam Sieminski: "By late summer we expect storage levels to have fallen below the normal range seen from 1994-1998." He points out that the net non-commercial (speculative) long position on the gas contract traded on Nymex has been rising steadily and is now the highest it's been since August 1999. And in a surprise move, Alberta Energy Co., one of Canada's biggest gas producers, just paid $C910 million (about US$630 million) to scoop up a majority interest in the 3-trillion-cubic-foot Jonah Field in Wyoming, one of this country's premier gas fields found in the 1990s. Is this some kind of tacit admission that enough gas won't be forthcoming from Canada in the next two years? Interestingly, in a recent poll of 65 U.S. and 59 Canadian firms, conducted by Ziff Energy Group, the Canadian respondents said they expect lower net export growth from their country than the U.S. respondents do. Canadian gas well completions hit an all-time record in 1999. So much for the ho-hum shoulder months between the end of winter and the start of driving season. Opportunity is creating a new paradigm where gas prices may be under more pressure going into the air conditioning season than they typically are going into winter. That's why most analysts are increasing their already bullish gas outlook. Salomon Smith Barney E&P analyst Robert Morris has upped his 2000 composite spot gas price forecast to $2.78 per MMBtu from about $2.50 previously. His estimate for the rest of the year looks like this: an average of $2.80 in the second quarter, $2.85 in the third and $3 in the fourth. That is 16 cents below what the NYMEX strip indicates. The U.S. gas market remains unbalanced, says Ron Barone, gas analyst at PaineWebber. "Current natural gas flows are not keeping up with various sources of demand. This situation could deteriorate further as increasing power generation demand begins to compete with storage injection demand." He raised his composite spot price to $2.85 per MMBtu for the year and $2.60 next year. Analysts at First Union Securities are using $2.50 for the year, but, they add, "It would not strain our credulity to see gas prices surge above $3.50 per Mcf in coming months. While we do not predict $6-$10 gas...an important new class of buyer has emerged, the [relatively price-insensitive] incremental power generation provider. Natural gas is priced on the margin, that is, the price is set by what the last buyer is willing to pay." A peek into the power gen world is revealing. Orders for gas-fired turbines have now reached a three-year backlog due to surging demand; these units will be used in newly opened, or proposed but yet-to-be-built, gas-fired power plants throughout the U.S. Generators placed orders for 50 gigawatts of turbines in 1999. GE, the leading gas turbine manufacturer, says it will ship 244 units worldwide this year, up from 65 in 1998. In its 1999 annual report, GE said it plans to triple gas turbine production to meet volume demand. Its power systems orders totaled $14 billion last year; power systems revenues rose 19%. PG&E Energy Services has three plants under construction now and 12 in various other stages of development, so that it can triple its capacity in the next three years. Duke Energy has 3,900 megawatts of generation in operation, another 4,200 under development and 14,800 megawatts under longer-term development. Southern Co. and Kinder Morgan just announced plans to build a new 550-megawatt gas-fired power plant in Arkansas, and Southern alone said it plans an 830-megawatt plant in Michigan that starts up in June 2001. The real trouble-or opportunity-is that gas production has been falling in nearly every state for several years, despite frantic gas drilling. Only gas from coalbed methane and deepwater sources has risen. PaineWebber's Barone cites the early May rig count of 833 (higher than 1999 but lower than 1998), and the fact that he still thinks the count needs to be about 1,000 to regularly replace production. A major report by Jefferies & Co. analyst Frank Bracken documents the conventional gas production trend clearly. It's down from 56 billion cubic feet a day in 1990 to 49.3 in 1999, despite a gas drilling surge throughout the 1990s. Warns Bracken: "We think most analysts have overestimated the extent to which wellhead gas deliverability can rebound."