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Deutsche Bank Offers Sober Assessment of Gas Markets through 2009

The dramatic tightening of money and credit markets, combined with plunging equity markets over the last few weeks, have exposed natural gas, oil and other commodities to "major downside risks," a Deutsche Bank analyst said Friday.

Speaking on the final day of the LDC Forum Canada, presented this year in conjunction with Canada's Industrial Gas Users Association, Joshua Sadler offered a sobering assessment of what his investment firm is forecasting for the markets and specifically for oil and natural gas.

"We are in the midst of one of the worst financial crises of all times, and you have a guy from the banking industry offering you advice on how to deal with it," Sadler deadpanned to the audience. However, he quickly turned to Deutsche's view of what may be ahead.

"The global economic outlook at the end of the third quarter, what we were hoping for, was 2.3% global GDP [growth in gross domestic product], but it's down considerably, now at 1.2%, and that's the worst level since 1981. It would probably be worse," he said, if some areas of the world had not performed as well as they did. "Two things have helped out a little bit on this. First was the rapid action taken by the banks and the governments for intervention into the markets. What we've seen so far to date is extreme volatility, but we are starting to see a little bit of liquidity movement in the debt markets. Three months into the year, those markets are expected to come around first, but it could be a difficult ride in the first quarter."

In the United States, Deutsche is forecasting 1.1% GDP growth for 2008, which is down from 2% in 2007. In 2009, the bank sees minus 1% GDP growth for the United States, which only moves to 0.9% growth in 2010. Global GDP growth is estimated at 3.2% in 2008, compared with 4.7% in 2007. In 2009, global GDP is forecast to be 1.2%, and in 2010, growth is estimated at 2.5%.

Deutsche sees a 45% probability of a "severe" recession, last experienced in 1981. Under this scenario, "in accordance with the GDP that we saw in the 1980s, there is a collapse in consumer confidence, in business confidence, and recovery only begins to emerge at the end of 2009." Although that forecast is unappealing, Sadler said there were more dire scenarios -- but they are less likely.

There's a 25% chance that there will be a "mild" recession, but that chance "may be lower considering the stock market's early performance Friday," Sadler noted. The last mild recession occurred in 1990. Deutsche pegs the likelihood of a "speedy" recovery at 10%. The last speedy recession was in 2001 following the Sept. 11 terrorist attacks. "Lastly, and I hope least, we predict a 20% possibility of a major depression -- the last which occurred in 1929, and in that case, banking failures would spread, unemployment would rise rapidly and we would contract for up to four years."

What may affect oil and gas commodity prices is the "contagion" from Asian markets, said Sadler. Asia represents more than 45% of the global consumption of oil and "if there is any downturn in Chinese GDP, that will have an obvious impact on commodities and energy."

The lower economic activity has "certainly had a negative impact on the demand for natural gas, and at the same time, we've seen increasing gas production," said Sadler. Since it is one of the cheapest alternatives, gas has moved down faster than the other commodities." Deutsche does not expect to see a tapering in U.S. domestic production, which is strongly higher, until late in 2009 as more rigs are laid down and producers reduce capital spending.

"A slower U.S. GDP and weather-induced demand destruction for natural gas over the past 18 months has been an Economics 101 exercise," he said. Higher demand from power led to higher prices, which spurred development, which spurred supply, and which ultimately led to an oversupply and a loosening in the markets, followed by declining economic activity.

"We are looking at a severe decline in growth in 2009" as the rig count falls and producers reduce their spending. However, "shale plays have very steep decline rates in their first year, and if we're not drilling more, we're not keeping up with production. We could see that growth disappear very quickly."

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