Noting that natural gas prices fell nearly 20% in August and were already down almost another 20% in the first four days of September, Raymond James analyst J. Marshall Adkins said fundamentals “remain awful,” but he expects a rebound to occur next year.

The analyst said the outlook continues to deteriorate for the commodity, adding that $1.50 gas is not entirely out of the question. “The market is only 1-2 Bcf/d tighter on a y/y [year-over-year] basis despite a 60% drop in the rig count and over 1 Bcf/d of completion delays and production shut-ins,” Adkins wrote in a Raymond James research note. “The y/y storage surplus is still up around 500 Bcf. The market may have to squeeze 200 Bcf out of the market, which could drive prices below $2/Mcf.”

Adkins, who slashed his natural gas price estimates in March, cutting the 2009 forecast to $3.75/Mcf and 3Q09 to $2.50/Mcf, said the pace of injections has slowed compared to last year, which is slightly bullish going forward. He said his 2010 outlook remains uncertain and will be shaped by the answers to three key questions:

“All in, we forecast $6/Mcf gas prices in 2010,” he wrote. “Things should rebound from their current depressed levels, but our confidence in the magnitude of such a recovery is relatively low.”

Despite the pullback in drilling activity, Adkins said companies have been high-grading their drilling prospects and supply has yet to “meaningfully fall.” In fact, he pointed out the latest EIA-914 data point showed that production in June actually grew sequentially (see Daily GPI, Aug. 31).

“After hovering around $3.75/Mcf from May to July (many would argue because of speculative forces like the UNG [United States Natural Gas fund]), the fundamentals finally caught up to natural gas,” Adkins wrote. “With inventories at record levels, the storage reset over the next couple months (necessary to rebalance the market) is going to be a painful time for producers.”

The analyst noted that in spite of the 60% peak-to-trough decline in gas rigs (or more than 1,000 rigs less than the peak) and more than 1 Bcf/d of delayed or shut-in production, he still believes the market will need to shut in as much as 200 Bcf of gas over the next 60 days, or more than 3 Bcf/d of shut-ins if companies began today.

“To cause such large shut-ins, we believe gas prices must fall below $2/Mcf this summer,” he wrote. “While it may seem like Armageddon for natural gas, the severe cuts in the rig count should help 2010 prices.”

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