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Energy Analysts Put Kibosh on Higher Gas Prices in 2009

Remember January 2008 (see NGI, Jan. 9, 2008) when U.S. natural gas prices hovered at around $7-8/Mcf and the biggest threats to prices were the weather and rising liquefied natural gas imports? Memories can be fleeting. Now several energy analysts predict that prices will have a tough time rising above the $5-6 level -- for the entire year.

In their U.S. gas market outlook issued at the end of December, analysts with Raymond James & Associates cut their 2009 price forecasts to $5/Mcf from $6.75. U.S. producers may have to shut in around half, or 800 Bcf, of output in the coming year to balance the markets, said analysts.

The domestic gas market has 6 Bcf/d -- or 10% -- more gas in the system than at the same time last year, and "that is a recipe for disaster," said Raymond James' J. Marshall Adkins and Christopher Butschek.

"The combination of strong supply growth and rapidly declining demand has caused an ugly natural gas outlook to turn much worse," wrote the duo. "Economic concerns in the U.S. are now weighing heavily on industrial and power generation demand, while the worldwide recession has depressed all commodity prices, effectively eliminating any fuel-switching incentives. Altogether, these changes have dramatically darkened our near-term outlook on natural gas..."

The analysts' expectations for a near-50% reduction in the rig count "will likely be too little, too late for 2009 gas prices," but it may be enough to balance the market by 2010. "Accordingly, we have initialized a 2010 forecast of $8/Mcf."

In early September Raymond James analysts predicted that 2009 gas prices would average around $6.75/Mcf, which at the time was about $3 below consensus estimates (see NGI, Sept. 15, 2008). Since then gas fundamentals have only gotten worse, said the duo.

"Now we have a demand problem," said Adkins and Butschek. "Earlier this year, we thought an unusually cold winter could possibly save 2009 natural gas prices. Now we are going to see significant natural gas production shut-ins and regional price collapses regardless of winter weather."

Consensus estimates by energy analysts are around $7.50/Mcf but "they are still way too high," said the analysts. Given the deteriorating economy, gas prices likely will be closer to $5, and "we expect to see certain regional gas prices (Rockies and Midcontinent) fall well below $2/Mcf next year to force producers to shut in production. Can you say U-G-L-Y?"

Raymond James' forecast is similar to several other energy analysts. Barclays Capital in December said weakness in the gas market would persist and prompt-month prices would average $6.36/MMBtu over the course of 2009 (see NGI, Dec. 22, 2008). And a gas price analysis by the team at Stephen Smith Energy Associates (SSEA) also dims the chance of higher gas prices this year.

The recent decline in the price of domestic gas came partially in sympathy with plummeting crude oil prices, "but also because of the increasing fall gas storage surplus, which has occurred despite extended [hurricane] Gustav/Ike gas shut-ins, extremely low LNG imports and colder-than-normal fall weather," said SSEA in a December report. And the storage surplus is likely to keep a lid on Henry Hub prices well into the new year, said the SSEA analysts.

"Weather surprises aside, we expect the pressure from this growing storage surplus to keep Henry Hub prices below $6/MMBtu for much or all of the year," SSEA said. Henry Hub prices are likely to trade generally in the $5-6.50/MMBtu range for most of the 2009-2010 period, SSEA analysts said.

SSEA analysts said they consider storage norms since Hurricane Katrina struck the Gulf Coast in 2005 to be roughly 400 Bcf higher than the 1994-2003 norms.

"The current gas price level is looking more like the new 'steady state' until much lower rig counts restore supply/demand balance to the North American gas market," according to SSEA. While OPEC production cuts will eventually break the oil price decline -- and, by extension, the natural gas decline -- "reduced gas production capacity, achieved via lower rig counts, will still have to be the main source of restoring gas market balance...We believe that the rig count will decline to at least 1,300-1,400 rig range before the North American gas market re-establishes supply/demand balance."

A reduction in rigs has been under way: Baker Hughes drilling statistics for the second-to-last week of 2008 indicated that the U.S. gas rig count stood at 1,347 rigs, which was 105 less gas rigs in operation than for the week ending Dec. 28, 2007 (see related story).

Reduced economic activity is also likely to reduce global LNG demand and prices, and LNG imports to the United States -- which declined sharply in the summer and fall of 2007 "and have been at extremely low levels since then" -- are likely to increase throughout 2009, according to SSEA.

"This implies that the task of rebalancing supply and demand in the North American gas market is not entirely a question of waiting for lower rig counts to reduce North American gas production. The time required for rebalancing the North American gas market is likely to be extended by the potential importation of excess global LNG supplies," the analysts said. "We expect to see over-supplied North American gas markets for all of 2009 and arguably much or all of 2010 as well."

While some early Hurricane Rita/Katrina recovery and the ramp-up of 1 Bcf/d from Independence Hub helped account for a sharp ramping up of total domestic production since early 2006, the main steady-state driver of production growth has been strong multi-year growth from the Barnett Shale and other shale and unconventional resource plays, according to SSEA.

"We now estimate 5.8% growth in U.S. gas production for 2008, as compared with 4.3% growth in 2007...the estimated annual production rate for 2009 is 1.8%," the analysts said. The 2009 production estimate reflects a mid-year production peak due to the anticipated decline in the gas rig count.

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