With natural gas storage at the end of the winter heating season considerably lower than expected, the natural gas bears at Raymond James & Associates Inc. have switched sides and are again running with the bulls through 2008. Two other energy analysts also raised their gas price forecasts through the rest of the year.
Last September Raymond James analysts made the case for an overabundance of storage during the winter that would lead to a collapse in gas prices in the final 10 weeks of winter (see NGI, Sept. 24, 2007). "At least we got half of it right," said Raymond James analyst J. Marshall Adkins in a note to clients. Now, he said, "it is time to update our forecast and take our spanking for our bearish gas call." Since the end of January, "our bearish gas call has looked pretty stupid as gas prices have continued to rally upward...So where did we miss it? The simple answer is weather."
U.S. weather temperatures were on average more than 13% colder than the 10-year average in the last 10 weeks of winter, and the colder U.S. weather generated nearly 400 Bcf, or more than 5 Bcf/d, more gas demand than normal, Adkins noted.
The outlook for summer gas prices now has improved "substantially," he said. "In fact, bullish year-over-year liquefied natural gas (LNG) comparisons should help support U.S. natural prices into June." Raymond James has predicted 2008 gas prices at $8/Mcf, up from its earlier call of $6.50. However, "we think there is still some risk to late summer natural gas prices. Our updated gas model shows that if the U.S. has normal (10-year average) weather this summer, the U.S. will be on the brink of having to shut in gas production (gas prices collapse) later in the summer. In other words, we now think there is a 50/50 chance that gas prices collapse later in the summer."
If summer weather is warmer than normal, summer gas prices "hold up in the $10 range," Adkins wrote. "If the weather is mild (i.e., colder than the 10-year normal), then we still may see sub-$6 gas later this summer." The "odds of a late summer gas price collapse have now been reduced from an 80%-plus probability to only a 50% probability. Of course, the key to a summer price meltdown hinges on the likelihood of filling gas storage before the Oct. 31 traditional end of summer. If storage fills earlier, then producers would be forced to shut in production and gas prices would likely collapse."
The emergence of the Barnett Shale and other shale plays "has driven mind-boggling increases in U.S. gas supply despite relatively flat drilling activity over the past year," Adkins noted. "U.S. gas production at the end of 2007 was up an astonishing 7% (or 4 Bcf/d). Based on robust 2008 production guidance from publicly traded companies and strong cash flows from currently high gas prices, we now think that U.S. gas supply could continue to grow at a 4 [Bcf/d] to 5 Bcf/d rate through 2008. Ultimately, the high decline rates of these wells will drive a peak in U.S. gas production, but that may be years away. For this summer, we are modeling U.S. gas supply up 4 Bcf/d over last summer."
LNG should not be a "big difference maker" for U.S. gas this year, Adkins said. "Six months ago, increased LNG imports into the U.S. were looming as a big negative for U.S. gas prices. Since then, LNG liquefaction plant delays, a cold winter in Europe/Asia, a drought in Spain and international coal supply disruptions have kept LNG cargoes mostly away from U.S. shores. We now think LNG imports into the U.S. will be down for the full year 2008."
Raymond James expects U.S. gas supply -- including imports and exports -- will be up about 2.7 Bcf/d this summer. Meanwhile, U.S. gas demand "should be up only 0.5 Bcf/d. That leaves the U.S. gas market 2.2 Bcf/d oversupplied relative to last summer. If the summer weather is hotter than the 10-year normal, then gas prices should remain in the $10/Mcf range. If summer weather is cooler than the 10-year normal, then late summer gas prices could still collapse below $6/Mcf." If U.S. gas supplies continue to grow this year because of unconventional onshore supplies, "then cold weather comps [comparisons] and easy LNG comps begin to paint a bearish picture for late 2008/2009," Adkins wrote.
Energy analysts John Gerdes and Michael Dane of SunTrust Robinson Humphrey/the Gerdes Group (STRH) on Monday also adjusted their 2008 gas price upward to $8.88/Mcf and estimated that 2009 gas prices would average $9.50/Mcf. STRH's 2008 gas price forecast has ranged from $8 to 9/Mcf; early in 2007 its long-term gas price forecast was $9/Mcf.
"Entering the year, our assessment of the global LNG landscape indicated the U.S. would struggle to meaningfully increase LNG imports in '08," wrote the STRH analysts. "Our view was U.S. LNG imports in '08 would probably average 2.5-3.0 Bcf/d. Yet the dearth of first quarter LNG shipments (+1 Bcf/d) and anticipated winter weakness in U.S. LNG imports looking forward suggest U.S. LNG imports this year will probably average 2.0-2.5 Bcf/d."
Growth in U.S. onshore gas production also is "showing signs of slowing," wrote Gerdes and Dane. Since last fall, "the modest decline in U.S. gas-directed drilling in a sub-$8 gas price environment appears to have slowed the near-term growth in U.S. onshore gas production. Notably, the sharp rise in onshore gas production last November was largely attributable to the return of price-related curtailments in the Rockies and continued strong production growth in Texas.
"In '07, the state of Texas, driven primarily by development in the Fort Worth Basin Barnett Shale, comprised essentially all the net growth in U.S. onshore gas production. Whereas strong growth in 'other states' and minor growth in Wyoming/Oklahoma gas production largely offset a strong decline in New Mexico and a minor decline in Louisiana gas production." The positive onshore productivity trends "should continue in '08, though at a lesser pace, and offset the natural deterioration in U.S. onshore well productivity," wrote the duo. "Next year, assuming an approximate 10% increase in gas-directed onshore drilling activity, full assimilation of new/refurbished onshore drilling equipment in [the first half of 2008] and a flattening industry resource play learning curve, onshore well productivity should revert to the low end of the long-term trend of 5% per annum deterioration."
In addition, Jefferies & Co. energy analyst David Abrams raised his U.S. gas price forecast to $8.25/Mcf, an 18% hike from his previous estimate. Abrams based the increase on an estimated 30% decline in LNG imports and a drop in Canadian imports this year. Gas prices could even go even higher over the coming months, he wrote, because of higher electrical demand.
"We believe our natural gas demand forecast ultimately could prove conservative as nonweather-related electrical demand continues to outstrip our estimates," Abrams wrote. "We have been stunned by the extent of nonweather-related electrical growth over the past several months. For example, February electric-weighted heating degree days were 12% warmer than the last year; however, electrical generation actually rose 1%."
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