Fitch Ratings is no longer optimistic about a rebound in natural gas prices this year, and late Thursday the credit ratings agency cut its 2009 base case price deck for gas to $4.25/Mcf (Henry Hub) because of the protracted global economic slump.
"Weak demand driven by a sharp global recession is the main driver of the revision to Fitch's price deck," said credit analysts. "As recently as late 2008, Fitch had anticipated a rebound in natural gas prices late in 2009 driven by a large and relatively quick supply response combined with lower levels of demand destruction than are currently being witnessed. While weather-induced demand stemming from either a hotter-than-normal summer or an active hurricane season could ultimately drive natural gas prices higher in 2009, the underlying fundamentals at this point have driven Fitch to expect weaker near-term prices as natural gas supplies remain high and demand continues to weaken more than anticipated."
Part of Fitch's assumptions about gas prices this year relate to the latest reports from the Energy Information Agency (EIA), which, among other things, found industrial market sector gas demand to be down by 10.1% in December 2008, compared with December 2007 (see Daily GPI, April 3).
"While there is a possibility that year-end shut-downs and inventory destockings are distorting the data, economic data continues to point to a deep and protracted economic slump in the U.S. with few near-term catalysts to reverse current trends," said analysts. "Recent commodity price declines are expected to present all end-users with some relief, which could slow demand destruction levels; however, most residential users won't see this relief until the winter 2009-10 due to pricing delays stemming from utility buying and pricing behavior."
Another area of concern for Fitch analysts is EIA's data on the level of gas demand by electric generation users. They pointed to year-end EIA 2008 data, which indicate a 2.8% decline in demand by electric generation users even after a relatively warm 2008 summer.
The EIA data also point to higher natural gas production in the United States, and that too is pressuring prices, said the Fitch team. Production declines following the pullback in drilling "likely" will be distorted compared with previous downturns in the U.S. gas market, said analysts. But more supply pressures may hit by the second half of the year once an expected surge in liquefied natural gas imports begins to hit U.S. shores, said Fitch analysts.
"Fitch continues to expect a significant amount of this gas coming to the U.S., particularly during the low demand summer periods, due to a lack of sizable storage capabilities outside the U.S."
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