Energy analysts are offering no good news to gas bulls that had toasted to the hope for a prosperous new year in 2011.

In their latest Energy Stat of the Week, Raymond James & Associates Inc.’s analysts J. Marshall Adkins, John Freeman and Darren Horowitz again offered a cautionary forecast. As of Friday they appeared to offer the least hope for stronger gas prices, with a forecast of $3.75/Mcf in 2011.

“By now, we have probably shed our ‘perma-bull’ gas price reputation on the Street,” the trio wrote, referring to their once bullish price outlooks in the last decade. “In fact, we flipped to the bearish side of the gas trade three years ago and remain there for 2011.”

The United States, they wrote, “will remain structurally oversupplied with gas until we see a step-change upward in demand. While that demand will eventually come, it will likely take a few years for the power industry to transition away from coal and toward natural gas; the industrial consumers of U.S. natural gas to ramp up capacity to fully take advantage of this imbalance between oil and gas prices; and the transportation infrastructure in the U.S. to embrace natural gas.”

One reason gas prices aren’t expected to rise this year is because domestic gas output in 2010 increased 0.5 Bcf/d a month in 2010. “Even if we conservatively assume that monthly growth rate slows by half to 0.25 Bcf/d, core gas supply would still increase 3.5 Bcf/d (over 5%) in 2011,” wrote the analysts.

In their 2011 energy market forecast, Tradition Energy’s Addison Armstrong, senior director of market research, and colleagues Eugene McGillian and Chris Dillman said they remain negative about gas prices and are likewise skeptical about the “sustained upside potential” for oil and refined products.

According to the Tradition Energy team, New York Mercantile Exchange gas prices this year should average $4.20/Mcf, which is 60 cents less than a forecast a few months ago. Crude oil prices in 2011 should average $88.25/bbl, analysts said.

“We are maintaining a negative bias for natural gas prices for 2011,” wrote the Tradition Energy analysts. “Unlike oil or refined products, which experienced some improvement in bullish fundamentals last year, the fundamentals for natural gas are decidedly poor…”

However, “years of watching the natural gas market have given us a healthy amount of respect for the potential for sharp rallies, so we prefer to be cautious when thinking about how prices may swing around in any given year. In fact, in our last couple of natural gas price forecasts, we erred by not being bearish enough. But the fundamentals of natural gas, plus the outlook for the U.S. economy in 2011, will create a challenging environment for prices to move higher,” they wrote.

“The cost structure to drill using the hydraulic fracturing method, combined with opportunities for producers to hedge their profits in the futures markets due to the shape of the forward curve, should ensure that production levels remain high,” wrote Armstrong. “For instance, the break-even cost to drill the first well in a shale play is reportedly around $3.75/MMBtu. If that were not low enough, estimates of the cost to drill additional wells on the same property fall to around $2.00/MMBtu.”

The estimated costs don’t account for everything associated with shale gas production, “but with futures prices at $4.46 for all of 2011, $5.03 for all of 2012 and $5.36 for all of 2013 producers have plenty of incentive to continue to increase drilling in order to maximize profits.”

The Tudor, Pickering, Holt & Co. Inc. (TPH) energy team, led by Dan Pickering, cut the 2011 Henry Hub gas price forecast to $4.00/Mcf from $5.00. Through March gas prices are expected to average $4.00/Mcf, falling to $3.50 in 2Q2011. In 3Q2011 prices are expected to average $4.00 and climb on average to $4.50 in 4Q2011. TPH’s longer-dated price forecast remains unchanged with 2012 at around $5.00/Mcf and 2013 and beyond at $6.00.

The rationale behind the price cut, said Pickering, follows TPH’s updated supply study published last October, which suggested that U.S. supply would grow at a rate of 2.5 Bcf/d annually if the gas-directed rig count failed to drop materially (see NGI, Oct. 18, 2010).

“Since we wrote the updated supply report, overall gas-directed rig count has only fallen 28 rigs (3% 4Q2010 from 3Q2010) and the current weather-adjusted storage trends suggest the gas market is still 1.5 Bcf/d oversupplied,” he said. “Assuming normal weather the rest of winter and 1.5 Bcf/d oversupplied, storage ends March ’11 at 1,867 Bcf,” which is 198 Bcf, or 11%, above year-ago levels and 168 Bcf, or 10%, more than prior maximum levels in March 2006.

In TPH’s projections for storage through this summer, on normal weather (2,000 Bcf injections) and 1.5 Bcf/d oversupplied (an additional 300 Bcf injection) “would leave storage at 4,200 Bcf, which is well above operational capacity of 4 Tcf. To avoid this overfill, gas prices have to fall to $4.00/Mcf to achieve incremental market share from coal in the power sector.

“Can the market ‘fix itself’ without lower gas prices? Yes, if the rig count falls 150 rigs in the emerging shale plays (soon!) or cold weather remains this winter, or a hot summer, but remember weather bets also have a downside (warm winter/cool summer),” said Pickering.

Meanwhile, Calgary-based AJM Petroleum Consultants maintained its AECO price forecast of C$4.10/Mcf, but analysts lowered their 2012 price prediction to C$4.50 from C$4.70.

“For Canadian natural gas to remain competitive with U.S. natural gas, our prices have to be lower than the American prices,” said AJM economist Ralph Glass. “A high Canadian dollar, and an increased supply of natural gas from American shale plays, combined with the U.S. economic recovery strategy to ‘keep America working,’ is pushing Canadian natural gas out of the U.S. markets. We have to maintain bargain basement prices to keep natural gas moving until we develop viable alternative markets. That will mean a tough year for Canadian natural gas producers.”

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