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Gas Price Fundamentals 'Rather Bearish' -- Barclays

Natural gas price fundamentals are "rather bearish" going into winter, and the continued turmoil in the financial markets likely will depress prices through 2009, said Barclays Capital energy analysts.

Based in part on growing U.S. gas reserves, combined with weaker economic conditions and recent mild weather, Barclays analysts adjusted their 4Q2008 average U.S. gas price to $7/MMBtu, which is down from an earlier estimate of $8/MMBtu. The Barclays energy team in September had estimated 2009 gas prices would average $8.35/MMBtu; it now estimates that gas prices in the coming year will average $7.65.

Analysts George Hopley, Biliana Pehlivanova and Michael Zenker offered few positives for gas bulls in their Natural Gas Weekly Kaleidoscope, which was issued last Tuesday.

"Getting an accurate read on natural gas fundamentals remains an elusive goal, if only because once that understanding is seemingly gained, the underlying trends have shifted again," wrote Hopley and company.

The analysts cited the Energy Information Administration's (EIA) U.S. gas reserves estimates for 2007, which was issued in October (see NGI, Oct. 20). EIA's reports "may be limited as a guide for future production, but even so, the large annual gains should not be discounted."

EIA's reserves estimates report "serves more to confirm what we suggested in 2007 and has been widely accepted, in stages, in 2008" concerning unconventional gas reserves, wrote the Barclays team. "While individual companies may report success in the latest exploratory effort, complemented by knowledge gained in further development activity, an awareness of larger trends may not be immediately apparent from single observations.

"A plethora of companies repeating the same story of prolific resources and production potential meant that a shift to highlighting the unconventional was all but confirmed."

On an annual basis, EIA's estimate of the rate of annual gas production "appears relatively stable, if only marginally turning higher during 2007, reversing the decline since 2001," the analysts noted. "In contrast, changes in total dry gas reserves (net of production) have barely managed to outrun the rate of production, until last year when the next change surged, mostly as a result of extensions and net revisions."

In addition, "gas prices remain under pressure as the broader financial markets continue to suffer losses and mild weather so far has provided little support," the trio wrote. "Fundamentals are indeed rather bearish going into the winter with supply/demand balances looser by about 2 Bcf/d in 1Q2009." Still, the Barclays team believes that "the latest sell-off prices have overshot to the downside."

Winter weather should soon begin to lend support to an uptick in U.S. gas prices, said the analysts. They estimated that in the final three months of 2008 prices would average $7/MMBtu, and full-year 2008 should average $9.06/MMBtu.

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