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How Low Will Gas Prices Go? $2 May Be Bottom

U.S. natural gas prices haven't hit bottom yet, and they could decline to $2/Mcf "or below" at some point this year, according to forecasts by several leading energy analysts.

"The outlook for gas this year is terrible," said J. Marshall Adkins of Raymond James & Associates. He told an audience at Enercom's Oil & Services Conference last month that the phenomenal surge in U.S. gas supplies has collided with not only low prices but an unexpected jolt from plummeting industrial demand in the last few months.

"The bigger problem is the massive reductions in demand that have emerged in the last three or four months," Adkins said. "The massive reductions in demand and surge in supply combination means no good news for natural gas over the next three to six months."

Adkins noted that "from 2004 on, we've seen pretty good growth in electric generation demand...Every recession you have blips down in electricity consumption, and it comes from natural gas. The economy was already slowing electricity demand. And then industrial demand began slowing with the economy..."

The weak economy has reduced 2009 gas demand to the point that the U.S. gas rig count, which has dropped by triple digits since last September, "won't fall fast enough," said Adkins. "So there's no near-term good news for U.S. natural gas...Gas looks ugly from here."

Prices peaked at $13.10/Mcf last July. Now Raymond James is forecasting gas prices to sink to around $3/MMBtu by the end of March.

But Raymond James, and other energy analysts, think $3 won't be the bottom.

Tom Petrie, who also spoke at the Enercom conference (see related story), said there is "no question that we are finally into a period of meaningful and potentially prolonged oil and gas price retrenchment...I agree with Marshall, gas may fall to $2. It could happen this year, if we bring on the right surge of gas with LNG [liquefied natural gas] in the Gulf at the wrong time. But it's not necessarily the new rule. It just may well be an instantaneous event, a headline event that we'll have to live through."

Ron Denhardt, vice president of natural gas services at Strategic Energy and Economic Research, thinks gas prices may average $3.50 from April through October. But, he said, "it is quite possible that prices will decline below $2/MMBtu."

With "normal" weather going forward through the winter season, forecasted gas storage levels at the end of March could stand at around 1.666 Tcf, which is well above the 1.247 Tcf at the end of the 2008 storage season and higher than the five-year average of 1.486 Tcf, Denhardt said.

The amount of gas in storage could end the heating season 11% above average, even if gas withdrawals in the next weeks were to match the five-year average, said MF Global analyst Mike Fitzpatrick.

"The grim facts for gas are contained in the contracting demand, a consequence of a faltering economy, mild weather not being able to generate much heating load and no significant test of stockpiles, which may leave a record surplus at season's end," Fitzpatrick wrote in a note to clients.

If, as expected, storage remains high, "the market could absorb the loss of substantial production because of hurricanes or strong demand from hot weather with a minimal impact on prices," said Denhardt.

Unless producers shut in some production, working gas in storage could top 4.4 Tcf by Oct. 31, or 400-500 Bcf more than capacity, by the end of the traditional injection season, Denhardt noted. Producers will have no choice but to shut in gas by this summer, Adkins said.

"Year over year, gas consumption is down 1-2%, and there is clearly an impact on the natural gas demand side," said Adkins. The analyst expects to see "at least a 1 Bcf/d decline in natural gas demand right now from lower electricity demand. The market is oversupplied by 6-7 Bs [Bcf] a day...There's no good news coming from gas because of this oversupplied situation, and the bigger issue is, can it carry out through the summer?...

"In the Rockies, we've seen prices for less than $1 for a week or two, and maybe 1 or 2 Bs are shut in for a couple of weeks. Today, this model says that we've got to shut in 15 Bs a day for three or four months..."

By the time 2010 begins, Adkins thinks "supply will be down 6 Bcf/d, which sets up a recovery for 2010...We see a low point in the late summer time frame..."

Regardless of the prices here, more LNG shipments should arrive on U.S. shores by late summer or early fall because they'll have no place else to go, said Petrie.

"I think we'll see more LNG coming to the United States in the third or fourth quarter," Petrie said. "It likely will go to Europe first and then a portion will come to the U.S. as well...new deliveries to the Atlantic Basin" (see related story).

Besides more LNG, more gas soon will be piped across the Upper Midwest through the expansion of the Rockies Express Pipeline and "we'll have a situation where that extension into Ohio markets will be creating pressure back to the Midcontinent area," said Petrie. "That's going to occur at a time when that growth in available gas from the Barnett, Fayetteville and Haynesville [shales] is going to create a really tumultuous period, a rotating big basis blowout."

The basis blowouts that have occurred in the Rockies are "infamous, but the beginnings of that are beginning to show up in the differentials elsewhere and that creates market price tests," said Petrie. "Ultimately it will resolve itself, and there will be new prices for the Southeast and West Coast to help alleviate amply supplied markets. But there will be a period of testing, without question."

New drilling technology brought on a huge surge in onshore gas well output, which Raymond James estimates is 8% higher now than at this time in 2007. According to Adkins, average U.S. gas wells in 2007 produced at three times the rate they were producing in 2006. And there's no stopping the gas gushers now. "They're just continuing to improve. That's what happened."

By itself the Haynesville Shale is pouring on the gas, said Adkins. A typical Haynesville well, he said, is "10 times more productive than an average well. Yes, they decline faster, 75%, plus or minus," but the Barnett wells "dwarf" in comparison with the Haynesville play.

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