First Energy Capital analyst Martin King — who is considered to be one of the best when it comes to anticipating movements in the North American natural gas market — has shifted to a much more bearish price stance for North American gas prices in the short, medium and long term compared to his previous price forecasts.
“We have elected to shift to a more price bearish stance calling for an average price of US$4.63/MMBtu for 2010, nearly 40 cents lower than previously forecast. For the medium- to long-term outlook, we have downshifted our price expectations significantly, seeing 2011 at US$4.75/MMBtu, a full dollar lower than previously projected, while 2012 is forecast to be US$5.00/MMBtu, a drop of US$1.25/MMBtu versus our prior forecast,” King wrote in his “World Natural Gas Markets: Interim Natural Gas Prices Forecast Update” last Monday.
“We are promoting avoidance of the North American natural gas investment space, seeing robust supply and high storage levels until well into 2012 when greater potential for a more sustained price recovery exists,” he said.
But before prices can recover, they are going to have to “remain low enough for long enough in order to undermine the economics of key resource plays, slow drilling and negatively impact supplies. In addition, more demand needs to emerge in a lower-priced environment to mark a clear shift in underlying market balances from one of expected steady surplus to one of tightness,” King said.
“Should the natural gas-minded investor abandon all hope? In book one of Dante’s The Divine Comedy, there is an inscription at the entrance to hell that reads as, ‘Abandon Hope All Ye Who Enter Here.’ This might nicely phrase up what is becoming the state of the natural gas market,” he said.
“Although Dante had to deal with several beasts (lion, leopard and a wolf) prior to his entering the Underworld, one of the beasts that we think should be added to the hell of the current natural gas market is a dragon. Specifically a supply dragon. For that is what must be slain if the natural gas market is to make any kind of sustained price recovery,” King said.
“With this interim price forecast update we are effectively abandoning hope that any price recovery on the scale that we had been previously forecasting for late 2010 and 2011 will come to pass. Instead we are now wielding a price sword to slay this supply dragon with the view that prices low enough for long enough will tilt the balance of the market firmly to a structurally undersupplied situation.”
But slaying the supply dragon “may take some time and it may not be until late 2011 or into 2012 before signs of a more reasonable and structurally supported price recovery start to emerge. Gas drilling and supply have to be hit hard for a sustained period of time by low prices in order to truly put to the test the economics of many of the key resource plays that continue to power the U.S. domestic gas supply juggernaut,” King said.
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