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Plump Storage Levels Expected to Keep Summer Prices Low

Natural gas prices will likely remain between $3.75 and $4.75/MMBtu this summer due to healthy storage levels and normal temperature forecasts, according to Stephen Smith of Stephen Smith Energy Associates.

In a base case price outlook through July 2009, Smith said assuming an environment of $50-65/bbl crude, six-year averages for cooling and heating degree days and a summer weekly peak of 2.9 Bcf/d of liquefied natural gas imports, approximately 3,016 Bcf should be in underground storage on July 30, which would represent a surplus of 838 Bcf versus 10-year storage norms and is considerably larger than the 328 Bcf surplus one year earlier.

"In this environment we estimate a late July 2009 gas-to-resid spread in the range of minus $3.50/MMBtu to minus $2.50/MMBtu," he said. "An assumed NYH [New York Harbor] 1% resid price of $7.25/MMBtu for late July would then imply a likely August Henry Hub bidweek price range of $3.75-4.75/MMBtu (midpoint $4.25/MMBtu)."

Smith's base case estimate would keep prices at levels similar to current ones. Over the last three weeks, front-month natural gas futures have traded within a $1.42 range between $3.155 and $4.575.

Smith said his calculations show that the storage surplus will likely continue to grow in the reports for the weeks ending May 22 and May 29. Due to reduced heating and cooling degree day estimates, the analyst sees the surplus vs. the 10-year norms expanding by 17 Bcf for the week ending May 22 and by another 16 Bcf for the week ending May 29.

Separately, Wood Mackenzie analysts said last week that a trio of challenges over the next three years -- low demand, new coal-fired power plants and a surge in liquefied natural gas (LNG) imports -- would put downward pressure on U.S. natural gas prices until 2012.

The global economic contraction that began in the last half of 2008 stunted power demand at the same time gas supplies began to surge domestically, said Jen Snyder, who analyzes North American gas and power markets for the UK-based researcher. More coal-fired power plants globally are scheduled to come online in the next two years, which also will reduce gas demand for the power sector, she said. It won't be until 2012 that coal capacity additions will "grind to a halt," she said.

"As quickly as it started, our Renaissance in U.S. gas supply slipped into the Dark Ages," Snyder said.

The U.S. gas rig count has dropped by half since September 2008, but even with less gas coming out of the ground, gas prices won't recover when gas demand recovers, she said. Wood Mackenzie is forecasting a "modest" uptick in 2010 for gross domestic product, but overall, gas demand likely won't recover until 2012.

Also hindering gas demand will be the arrival of more LNG. Around 12 Bcf/d of global liquefaction capacity is scheduled to ramp up to 2012, said Snyder. Some LNG capacity is scheduled to begin this year, but most is planned for 2011 and 2012. Even with an expected increase in European and Asian demand for LNG by 2011, there will be a "tsunami" of LNG hitting domestic markets, she said.

George Given, who tracks global power markets for Wood Mackenzie, also said the global recession may last for several more quarters.

Global industrial power load was down sharply in the first three months of 2009, and residential power demand has dropped more quickly than expected, Given noted. The drop in demand increases the likelihood that electric plants may be mothballed to balance supply and demand, he added.

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