The near-term outlook for oil prices has blurred but the outlook for U.S. natural gas prices is more in focus — and it’s not a pleasant picture, according to analysts with Raymond James & Associates Inc.

In a note Monday, the energy team, led by J. Marshall Adkins, said “greater clarity has revealed more blemishes” about domestic gas prices, which led analysts to cut the price forecast to $4.00/Mcf from $4.25 “with bias to the downside.” As to the natural gas outlook in the near term, they suggested, “Abandon all hope, ye who enter here.”

Weather-related gas demand led the team in early July to revise its U.S. gas price forecast “begrudgingly” higher to $4.25/Mcf from $3.75 (see Daily GPI, July 6).

“The primary reason for the upward revision was the above-average weather-related gas demand this year,” said analysts. “Since weather eventually normalizes, we remain firmly in the bearish natural gas camp due to the structurally oversupplied U.S. gas system. So far this year, the U.S. has grown year/year (y/y) gas supply on average more than 4 Bcf/d. Recent months have actually shown well over 5 Bcf/d of gas supply growth (or about 8% annual growth).”

For gas producers, the news is grim because “demand is not growing anywhere near as fast as supply. With the weather starting to cool off and normalize, the weekly injections have been getting larger. Over the past 15 weeks, the y/y gas market has been averaging roughly 2.0 Bcf/d looser (or more gas in the system). This has cut the large, weather-driven y/y gas storage deficit down sharply. If this trend continues, U.S. summer ending gas storage (end of October) should be within spitting distance of last year’s record 3.81 Tcf.”

For the final three months of 2011 gas prices now are expected to average $3.80/Mcf, which would be “in line with the strip,” said the analysts. Full-year 2011 gas prices then would average $4.10/Mcf, down from a previous forecast of $4.25.

Additional y/y gas supply growth in 2012 “of at least 4 Bcf/d will continue to paint an ugly picture for natural gas prices,” they said. “On the demand side, the extreme weather of this past year will make for some very tough comparisons.” In addition, gas demand, particularly related to the industrial sector, is going to have a difficult time growing at a solid rate if the U.S. and global economies begin to slow, said the analysts.

“While lower gas prices will continue to prompt an increased amount of coal-to-gas switching, this theme will not play out overnight. Right now, our 2012 gas storage model suggests a gas-price-busting 4.37 Tcf of ‘theoretical’ summer-ending gas inventories next year. Unfortunately, we estimate there is only about 4 Tcf of total storage capacity. That means gas prices will need to be low enough to encourage shut-ins, less Canadian imports, or more coal-to-gas switching.”

In any case, the issues point to next year having relatively depressed gas prices, wrote Adkins and his colleagues. “Even though this new forecast is well below consensus and the gas strip, we would argue that it is likely still too optimistic. In other words, if pressed, we would take the ‘under’ our $4.00 estimate for 2012 U.S. gas prices.”

©Copyright 2011Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.