Pour more water on the flame lit by the shale gas explosion in the United States, analysts said last week. There’s just too much gas in the world markets to handle, two separate energy teams wrote.
Deutsche Bank Securities Inc.’s 87-page analysis is detailed in “Global Natural Gas — Battlefield Analysis,” which was issued to clients last Monday. The United States, said analysts, has become an “island” gas market with a negative outlook.
Expectations for U.S. gas prices in 2011 were cut to $4.50/MMBtu on “downside risk” because more liquefied natural gas (LNG) imports (2.5 Bcf/d-plus) are expected to hit U.S. shores in the coming year.
“Much will depend on the behavior of Qatar in bringing LNG into the market, but our view is that volumes are highly likely to arrive,” said the team. “The simple conclusion, given the lack of price elasticity of U.S. gas demand, is that excess high-cost production must shut in.”
The global gas market is “fragmenting and differentiating.” There’s “too much gas supply and not enough demand, with low price elasticity of both,” which equals a “fundamentally bearish outlook for prices.” Even with LNG-implied links, gas markets are “re-regionalizing” because of fundamental contract/market differences.
“The unconventional gas game-changer now requires a demand response that is dependent on Washington, DC, to formulate either a comprehensive energy or CO2 [carbon dioxide] policy. But with 90% estimated chance of a Republican House, expect supply-friendly, unregulated demand rhetoric.”
Deutsche Bank analysts said the U.S. “outperformers” will be companies “with either a bias toward oil, or a gas portfolio focused on oil-price-linked Asian/Middle Eastern LNG. The less well positioned companies will be those with a large exposure to the marginal U.S. gas plays.”
Take, for instance, ExxonMobil Corp. (XOM), which now is the No. 1 North American gas producer with its purchase of onshore shale heavyweight XTO Energy Corp. The major’s ratings were cut to “hold” by the analyst team.
“In the near term, we are bearish on the price of both oil and gas, and XOM is the most defensive name in the group,” said analysts. “Having said that, the overhang from the XTO acquisition will likely remain a major drag on XOM, and may persist until the U.S. natural gas market normalizes sometime beyond 2012.
“XOM has and will always operate with an eye to the (very) long term. They see a future where demand is increasingly gassy, and thus made a major move into U.S. unconventional gas.”
Because it’s a “natural consolidator and efficient operator,” XOM may drive out the higher-cost exploration and production companies and “be the major U.S. gas player over the long haul. But over the medium term, U.S. gas prices will be under pressure, as a wave of LNG adds to an already bearish domestic dynamic, and XTO returns are therefore likely to remain low and highly dilutive to overall XOM returns.”
Even assuming “robust” economy-related demand for gas in 2011, it still looks ugly for prices through the coming year, Raymond James & Associates said in a separate report.
In their Energy Stat of the Week, analysts J. Marshall Adkins, Pavel Molchanov and Christopher Butschek said the gas market in 2011 will need more than a stronger economy. It also will need more coal switching or production shut-ins to help prices, they wrote.
The Raymond James team revised its 2011 gas price forecast by 50 cents to $4.25/Mcf, which is below an expected 2010 average price of $4.50/Mcf. “Similarly, our long-term-gas forecast will be reduced from $6.00/Mcf to $5.50/Mcf.” Over the coming five years the analysts expect gas prices to be range-bound between $3.00/Mcf and $6.00/Mcf.
The gas rig count is “remaining stubbornly high in the face of low gas prices,” which suggests that “supply growth will continue to happen if prices are anywhere near $6.00/Mcf. Consequently, we’ve lowered our long-term natural gas price forecast to $5.50/Mcf, with bias to the downside.”
The Raymond James team noted that it expected weak gas prices but “we didn’t see the higher rig count coming.” The analysts expected the rig count to peak around April and slowly roll over, ending 2011 below 800 rigs. However, six months later the gas rig count remains steady at just under 1,000 rigs.
“Even though U.S. gas supply growth has recently flattened, we believe the stagnation is bottleneck-related” to, among other things, pipelines and a shortage of hydraulic fracturing crews, which would mean the slowdown is only temporary.
The outlook for gas prices, wrote Adkins and his colleagues, “remains unrelentingly ugly.” In the past six months “prices have been range-bound between $3.75/Mcf and $5.00/Mcf…Moreover, the key supply/demand fundamentals in 2011 — core supply, industrial demand and electrical demand — look even worse today than they did six months ago. If our forecast is correct, $5.00/Mcf natural gas may soon seem like the good old days.”
The gas market got no relief this summer, noted the team. “The dog days of summer have been simply abysmal. Cooling degree days in July and August were 12% above normal and a whopping 17% above last year, or the hottest summer this millennium.
“While weather-related demand drove U.S. natural gas prices over $5.00/Mcf in early August, prices have since fallen below $4.00/Mcf as summer heat dissipates and an underwhelming hurricane season begins to draw to a close. To add insult to injury, gas fundamentals should get even worse in 2011.”
Four key variables are in Raymond James’ bearish forecast. On a y/y basis November to November, the analysts are forecasting:
If those variables are correct, the domestic gas market would be more than 2 Bcf/d “looser,” with more gas in the system, on a y/y basis, which in turn would yield to “theoretical summer-ending storage of over 4.2 to 4.4 Tcf. This means the market will need to price out about 300 Bcf, or roughly 1 Bcf/d of natural gas supply…”
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