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Raymond James: Cold Winter Won't Prevent 'Ugly' Gas Prices

November 17, 2008
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The 2009 natural gas price outlook is "still very ugly" and given the current over supply, even a colder-than-normal winter is unlikely to prevent a gas price collapse in 2009, Raymond James & Associates Inc. said last week.

The possibility exists for a short-term, weather-driven rally over the coming six weeks, wrote analysts J. Marshall Adkins, James M. Rollyson and John Fitzgerald in the latest Stat of the Week. "We emphasize the short-term."

Raymond James' 2009 gas price forecast now is set at $6.75/Mcf, but that price expectation could move lower over the coming year. Eventually gas prices "will fall low enough to encourage (or force) certain regions of the country to begin shutting in or curtailing gas production," and "they must occur to rebalance gas storage before the end of next summer," wrote the trio.

Under Raymond James' current base case assumptions, 2009 summer-ending gas storage could be more than 4,250 Bcf, even though total storage capacity is about 3,750 Bcf.

"In other words, our gas model currently suggests that U.S. gas producers will need to shut in over 500 Bcf of gas over the next year," said the trio. "If we assume 10-year average winter (rather than the 30-year average in our base case), U.S. gas producers would need to shut in over 750 Bcf in 2009."

Despite its negative outlook, Raymond James hasn't cut its 2009 price estimates yet because of several factors:

Another factor impacting the gas supply and prices is expected economic-driven gas demand stagnation, the analysts noted. Raymond James' 2008-2009 winter gas model now expects the market to withdraw 600 Bcf less from the system this season than the last winter season.

In its Weekly Gas Outlook also published Monday, Stephen Smith Energy Associates Inc. said its gas supply/demand model projects a storage build of 45 Bcf for the week ending Friday (Nov. 7), which would increase storage to 3,451 Bcf from 3,406 Bcf. This would compare with a normal seasonal draw of 16 Bcf based on 1994-2003 norms.

"Our expectation for a well supplied year-ahead gas market is still intact -- the ongoing strength in onshore shale gas production will continue to be a dominant factor for the 2009 gas market," the Smith analysts noted.

Even with the lingering hurricane-related shut-ins in the Gulf of Mexico, "the higher rig count should perpetuate year/year (y/y) gas supply increases through the first quarter of 2009," Raymond James analysts wrote. "The bottom line is our winter gas model assumptions are probably too bullish. If we have a winter similar to the 10-year average and gas supply continues its recent trend upward, gas storage will look much uglier than our current model predicts and gas prices should be even lower by the end of the winter."

It gets no better going into the 2009 summer injection season, which could begin with more than 400 Bcf in storage, if Raymond James' winter assumptions hold.

"Even if we really tone down our key supply/demand assumptions for next summer, our 2009 gas model still implies a theoretical y/y gas inventory increase of nearly 900 Bcf over the next 12 months," Adkins and his team wrote.

"Again the real world will not let this happen, and gas prices will likely fall much sooner due to the reality of gas-on-gas competition," the Raymond James analysts noted. "That means that lower prices will drive out much of the implied gas supply growth..."

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