The near-term outlook for U.S. natural gas prices has come into focus — and it’s not a pleasant picture, according to energy analysts.

In a note last week Raymond James & Associates Inc.’s 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.”

Besides the weather and the miracle of shale gas, “it’s the economy, Stupid.” On Friday FBR Capital Markets analysts Rehan Rashid and Saurabh Lele cut their commodity price assumptions to reflect a continued slower gross domestic product growth outlook and higher than previously forecasted Marcellus Shale production.

“We are lowering our 2011 and 2012 natural gas forecast to $4.28/Mcf and $4.50/Mcf, from $4.38/Mcf and $5.00/Mcf,” said the FBR duo. 2012 oil also takes a hit. “We are maintaining our 2011 crude oil price at $92/bbl while reducing our assumption for 2012 forward to $80, from $85.”

And the FBR team said the current consensus estimates among analysts assume average natural gas prices in 2012 holding steady to the $4.10/Mcf average expected in 2011. Oil meanwhile drops from $92.50/bbl in 2011 to $85/bbl in 2012.

Some extraneous reports have suggested the U.S. economy won’t turn around until oil hits $75/bbl, putting some spending money back into the pockets of consumers.

Meanwhile, the American Gas Association (AGA) said last week gas prices for the 2011-2012 winter season will be similar to prices from last winter, but it stressed that a repeat of the gas delivery disruptions seen last February in the Southwest were unlikely this time around due to warmer weather and higher gas supplies.

“There is an abundance of shale gas, and our expectation is that the milder weather will contribute to stability in the commodities market,” AGA’s Chris McGill, managing director for policy analysis, told NGI. “We see stability in the market in terms of prices and bills, including for natural gas, and the prices will be similar to last year.”

McGill said the AGA isn’t expecting temperatures on par with the extreme cold from early February, which caused well freeze-offs, power outages and compressor failures. The cold snap in turn interrupted gas deliveries to thousands of customers in New Mexico, Arizona and Southern California supplied through El Paso Natural Gas and Transwestern Pipeline (see NGI, Feb. 7).

“We’re not expecting to see another outage like that,” McGill said. “Outages in any parts of the country are rare, and we don’t expect the conditions that led up to those disruptions to be repeated. But everything is dependent on what the weather does.”

Weather-related gas demand led the Raymond James team in early July to revise its U.S. gas price forecast “begrudgingly” higher to $4.25/Mcf from $3.75 (see NGI, July 11).

“The primary reason for the upward revision was the above-average weather-related gas demand this year,” said the Raymond James team. “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 Raymond James 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.”

Deutsche Bank’s Adam Sieminski said Friday the financial bank’s Houston meteorologist is forecasting a cold winter, despite a warm start in October. Many analysts forecasting low gas prices in 2012 “say it is improbable that the cold winter and hot summer that supported gas prices in 2011 will be repeated. This may not prove to be as simple a conclusion as it appears to be.”

Because of the “relatively good market visibility on daily production” the driver of recent large gas storage builds reported to the Energy Information Administration “probably is on the demand side (industrial or power generation demand),” Sieminski said. “Storage is now forecast to reach a peak of 3,775 Bcf in mid-November followed by an April bottom at 2,000 Bcf-plus.” The financial bank’s forecast “for an abnormally cold December, January, February may be the only hope left for rescuing the gas price from its current doldrums.”

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