Despite recent assertions to the contrary, gas prices will retain their winter premium for years to come, analysts with Barclays Capital said the week ending January 18.

Michael Zenker and George Hopley noted that price premiums for the current winter and future winters "have been on a steady pullback over the past few months."

While some market observers have interpreted that to indicate that summer is becoming the highest-price period for gas, "our view is that there are strong fundamental reasons why winter has been, and will continue to be, the premium price season."

The analysts explained that fundamental factors late in 2007 - including relatively mild weather and record-high gas storage inventories - led to the current softness in the winter premium.

But while storage levels leading up to the heating season should theoretically influence the winter premium, that relationship "is loose at best," they said. "In fact, storage is more often a misleading than a useful indicator of the direction of spreads."

The market could, for example, have a bearish outlook for October gas prices but a bullish one for January, "causing the spread to depart from earlier levels."

Interestingly, "winter premiums began to move well above historical levels beginning in July 2004 and have not returned to pre-2004 levels," Zenker and Hopley said. "In this context, the pullback in the winter premium is simply a retreat to earlier levels."

For example, from 1997 until June 2004, winter prices averaged roughly 39 cents/MMBtu over summer prices, after which the premium began a steady rise and peaked in the fall of 2006 at nearly $4/MMBtu.

"Since July 2004, the winter premium has averaged $1.92/MMBtu, nearly five times the level of previous years," the analysts explained.

They also maintained that "there is no steady state level for the winter spread;" instead, it reflects an insurance premium for winter gas, "especially for those who must buy gas during the winter to meet customer needs no matter what the price.

"This inelastic buying, in combination with shifting perceptions about the level of available supply in any given year, suggests to us that the winter premium will move up or down with the market's collective view on winter risk," the analysts said.

However, they noted that, since the winter premium appears to grow in a higher-priced market, "we believe that a price pullback in 2008 would also pull winter spreads lower."

A bearish sentiment in the market will weigh on those spreads but "will be halted if the sentiment turns bullish, which we believe will occur in late 2008 or early 2009."

Created: January 21, 2008