Strong domestic production and robust summertime liquefied natural gas (LNG) imports should lead to another year of record storage levels in 2008, according to Raymond James & Associates Inc. The firm has cut its 2008 full-year price forecast by 50 cents to $6.50/Mcf, the lowest since 2004. The analysts note that their forecast for 2008 is more than 15% lower than the Bloomberg estimate and more than 17% below the Nymex futures strip.
And that won't be enough to spur the production needed to keep the market in equilibrium, according to analysts at SunTrust Robinson Humphrey/the Gerdes Group (STRH).
"An $8-8.25 [per MMBtu] average gas price appears necessary to provide the financial incentive to modestly increase U.S. drilling activity and maintain gas market equilibrium in '08," STRH analysts wrote in a note last week. That price is based on the belief that a 4% increase in U.S. gas drilling is needed in 2008 to keep the market balanced and the expectation that the exploration and production (E&P) sector is comfortable budgeting 10-15% free cash flow negative.
However, "if the E&P sector budgets capital expenditures in line with cash generation this year, the needed increase in drilling activity in an $8-8.25 gas price environment would not occur and [would] eventually result in an even higher gas price," the STRH analysts wrote. The firm's 2008 gas price forecast is $8.13/MMBtu, and its expectation for 2009 is $9.00/MMBtu. For 2009, Raymond James is looking for $7.00/Mcf.
Raymond James derives its bearish outlook from the success of domestic producers, particularly in the Fort Worth Basin's Barnett Shale, and greater availability of summertime LNG due to growing global liquefaction capacity. Analysts at Ziff Energy Group also are predicting significant growth in LNG imports to the U.S. (see related story).
"Barring a hurricane or record weather (cold in winter or heat in summer), 2008 is now shaping up to be very bearish for gas prices," Raymond James analysts wrote in a note last week. "The incremental LNG that we are forecasting to hit the U.S. market (+1.5 Bcf/d y/y) and increased domestic production (+2 Bcf/d y/y), both onshore and offshore, thanks to the Independence Hub and Rockies Express Pipeline [REX], all points to excess supply. Thus, we expect record storage levels despite forecasts of a decline in Canadian imports and increased domestic demand."
Look for storage fill to happen by September, a month before withdrawals begin, with ensuing gas-on-gas competition causing "prices to drop significantly," the Raymond James analysts wrote.
STRH isn't bothered as much by strong storage builds due to the advent of summer demand peaks on the back of gas-fired power generation. "[I]ncreasing gas storage entering the heating season appears necessary to provide the gas available to satisfy growing power generation demand during the heart of the cooling season," STRH analysts wrote. "Specifically, since '02, the growth in gas-fired power generation during the heart of the cooling season appears to have required approximately 50 Bcf per annum of additional gas in storage entering/exiting the heating season." The STRH target for gas storage on Nov. 1 is 3,400 Bcf, "elevated...yet...reasonable," the analysts wrote.
And the STRH analysts aren't as enthusiastic about North American gas supply prospects as their counterparts at Raymond James.
The impact of REX will be muted by the fact that "overall, Rockies gas supply is probably not meaningfully transportation constrained," STRH said. In the Gulf of Mexico (GOM), the Independence Hub, which achieved 1 Bcf/d of production at year-end 2007, "should stabilize '08 GOM gas production."
And while the period of March-August 2007 saw the U.S. as the most attractive destination for global LNG due to weak markets in Europe and the Far East, "by late August, as European and Far Eastern gas markets strengthened, global LNG trade flows began to rebalance to the detriment of the U.S."
STRH analysts do tip their hats to increased gas exports from the Norwegian North Sea to the United Kingdom via the Langeled pipeline. "Yet, the continued deterioration of U.K. and secondarily Norwegian North Sea gas production suggests that given normal heating conditions this winter, the massive discount European gas prices experienced relative to the U.S. last spring/summer is unlikely to be repeated."
The firm said an "optimistic" expectation of 3.2 Bcf/d of LNG imports in 2008 includes the start-up of liquefaction trains in Equatorial Guinea and Norway, which happened late last year, and lower imports from Algeria given a stronger European gas market. However, liquefaction constraints in the Pacific Basin could steer more Atlantic Basin cargoes to the Far East this year. "Accordingly, U.S. LNG imports may average 2.5-3.0 Bcf/d this year," STRH said.
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