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2010 Gas Prices Are For the Bears

A Tudor, Pickering, Holt & Co. (TPH) analyst last week cut the 2010 average natural gas price forecast to $6.20/Mcf, down from an earlier forecast of $7.50, because of the faster-than-expected pickup in domestic onshore drilling. That news was followed Wednesday by an IHS Cambridge Energy Research Associates (CERA) analyst, who predicted Henry Hub gas may fall below $4/Mcf by the end of this year.

The current gas prices, which are hovering below $5/Mcf "feel sustainable low," said TPH's Dave Pursell. However, the "stubbornness of supply declines and the aggressive rig count rebound now argue against a 2010 gas price spike," which the TPH team had previously forecast (see NGI, Aug. 31, 2009).

"Our new 2010 price forecast is $6.20/Mcf with the remainder of 2010 (2Q2010-4Q2010) at $6.50/Mcf," said Pursell in a note to clients. The $6.50/Mcf price was TPH's long-term estimate. However, it had estimated that prices in 2Q2010 would average $8.00, and it had expected prices in the second half of the year to be around $7.50.

"In the 'TPH Gas Supply Study' last August, we assumed the gas price would have to increase above our long-term $6.50/Mcf level to encourage increased drilling activity," said Pursell. "We could not have been more wrong. The gas-directed rig count is up 402 (plus 55%) rigs from late May '09 as gas prices averaged $4.5/Mcf. Horizontal gas-directed drilling (shales!) increased 259 rigs (plus 75%) and is now higher than the 580 rig peak in Oct '08."

Why set the average price at $6.50/Mcf and not lower? "Given the current sub-$5.00/Mcf natural gas price, we were briefly tempted to 'throw in the towel.' However, several factors prevented us from capitulating in 2010," said Pursell. They included:

Meanwhile, Shankari Srinivasan, who is a member of the senior leadership team at IHS Cambridge Energy Research Associates (CERA), offered an even more bearish outlook for gas prices at CERAWeek 2010 in Houston last week. She said the global gas markets are suffering under a "triple whammy" because:

"Gas demand likely will take two years to return to pre-recession levels," Srinivasan said. The LNG surge was easy to spot, given that it takes lots of money to build liquefaction trains, she noted. However, over the next two years LNG output is expected to be up 20%, mostly because of new production from Qatar facilities.

"But shale gas really came up on us by surprise," she said. "It was numerous small-scale drilling and hydraulic fracturing that led to more production at a lower cost."

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