Fundamentals point to lower natural gas prices in 2008, but for the near-term, gas prices will continue to be supported by high oil prices, Fitch Ratings analysts said in a report. Longer term, however, prices may fall dramatically.

Fitch Ratings' outlook for the global oil and gas industry remains strong because of the impact of high commodity prices and a tight supply/demand balance, "although the industry faces significant challenges in the form of cost inflation (including high drilling costs), commodity price volatility, and for the majors, resource access and reserve replacement issues." Natural gas prices, however, will continue to be volatile.

"Current pricing differentials, on a relative Btu basis, between gas and oil remain above 12:1 versus the historical average...and we believe this provides support to natural gas prices in 2008 at $7.00/Mcf," said analysts.

Fitch analysts said they expect gas prices to trend toward "our long-term average price of $4.50/Mcf."

Factors that appear to dampen Fitch's gas price forecast include "increased storage capacity in the United States, completion of the Rockies Express Pipeline, the strong supply response from producers (most notably from Independence Hub as well as major onshore basins such as the Barnett Shale), and waning demand by most end-use consumer groups except for electric generation users."

For the integrated producers, Fitch expects the excess cash flows from oil prices to continue to be directed toward "shareholder-friendly" activities, growth-oriented capital expenditures and acquisitions. "The slant toward shareholder-friendly activities may be especially pronounced for majors, which face unique significant challenges to replace reserves in the current environment."

Credit quality is expected to remain "above historical levels" for independents as a group, said analysts.

"In contrast to the integrateds, we believe independents have better opportunities for organic growth, and as a result, we expect them to use cash flows for growth-related capital expenditures as opposed to primarily for share repurchases," said analysts.

Most independent upstream producers took advantage of the "strong run in commodity prices" to improve balance sheets, enhance liquidity and reconfigure their asset portfolios through acquisitions or asset sales.

"Fitch has also noticed independents increasingly using higher commodity prices in their planning assumptions, which we believe may be used to justify increased balance sheet debt in the future. As this trend continues to play out in 2008, credit profiles are expected to moderate somewhat from the robust levels witnessed in 2006 and 2007."

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