A rebound in U.S. natural gas prices and drilling activity may be three or more years away, and energy analysts appear doubtful of a recovery this year.

The Energy Information Administration, which last week issued its Short-Term Energy Outlook for July, is forecasting Henry Hub prices to jump to an average $5.93/Mcf in 2010 from an average of $4.22/Mcf in 2009 (see related story). However, several independent analysts see a slower recovery.

A Wood Mackenzie energy analyst told attendees at the Colorado Oil & Gas Association's Rocky Mountain Energy Epicenter Conference last week that gas prices likely won't move higher for at least three or four years. Jen Snyder, who heads the North American gas research arm for Wood Mackenzie, offered her assessment at the 21st annual conference in Denver.

Wood Mackenzie analysts now see U.S. gas prices averaging $4.50/MMBtu in 2010, gaining only a quarter to average $4.75 in 2011, Snyder said. By 2012, the analyst is predicting domestic gas prices may rise slightly above $5/MMBtu.

"Fundamentals will suppress upstream activity levels" and won't rebound before a full economic recovery "takes hold in 2012 or 2013," said Snyder. "We see strong growth in the gas sector after 2012.

Over the next three or four years, the UK-based analyst sees four factors limiting a rebound in U.S. gas markets:

Domestic gas producers have become more choosy about where and what they drill, Snyder noted. However, even though gas prices have fallen dramatically in the past year, explorers will continue to drill in the shale plays. Some of the drilling is defensive, she said, because producers have to drill to protect their leaseholds, which they likely secured at a premium when gas prices were higher.

U.S. gas drilling is predicted to climb slowly over the next three years, with the gas rig count reaching about 1,100 onshore by 2012, according to Wood Mackenzie. The domestic gas rig count may move no higher than 740 rigs in 2010, which would be slightly higher than the current rig count, Snyder noted.

However, more rigs are not necessarily the answer anymore, she added. Because of gains in drilling technology, producers are finding more gas at less cost. An example is Southwestern Energy Corp.'s work in Arkansas' Fayetteville Shale, said Snyder.

The Fayetteville Shale and others "have become economic, even in a low-price environment," she told the audience. "In the past two years Southwestern's costs have dropped to less than $3.50/MMBtu" from $5/MMBtu. Those costs should continue to fall as more drilling and new technology takes hold, Snyder said.

There also may be better news for producers in the federal legislation now being considered on climate change, she added. If natural gas gains a more favorable role in the legislation, she said producers should look for gas prices to rebound faster.

Other energy analysts agree that a recovery in gas and oil prices is tied to the success of an economic recovery and the magnitude of North American gas reserves.

For instance, the U.S. gas storage surplus has seen only a "very modest impact" despite a huge cut in the onshore rig count, said Stephen Smith Energy Associates in a note to clients.

"The two weeks through mid-July may reduce the surplus by another 20 Bcf," Smith analysts said. "But by mid-July there will be only six-seven weeks until Labor Day -- not enough time for even a very hot second-half-of-summer to prevent near-capacity storage in the fall. Some combination of hurricane disruptions and price-driven producer shut-ins will be required to limit gas-in-storage to the available capacity. While lower U.S. production will begin to reduce the storage surplus in 2010, this decline is not happening quickly enough to avoid capacity problems this fall."

In its projections the Smith team said the domestic gas surplus may peak in early summer "but [we] still expect downward price pressure from a 'storage capacity crunch' in the fall." Assuming West Texas Intermediate crude prices of $60-75/bbl, a summer weekly peak of 2 Bcf/d of liquefied natural gas (LNG) imports and no substantial hurricane effects, Smith analysts are projecting a storage level of about 3,786 Bcf on Oct. 2, "which would represent a surplus of 938 Bcf versus 10-year storage norms," compared with a 460 Bcf storage surplus a year earlier.

"In this environment, with no hurricanes imminent, we estimate a late September 2009 gas-to-resid spread in the range of minus $6/MMBtu to minus $5/MMBtu," the Smith team said. Based on those assumptions, a "likely" October Henry Hub bidweek price would be $3.50-4.50/MMBtu.

Morgan Stanley analysts in a separate report said they are doubtful of a gas price uptick before 2010. Next year "will mark the beginning of the recovery" because major banks and governments will "maintain their current unprecedented level of economic stimulus," said analysts. "This should provide the necessary stimulus to maintain the restocking phase of a new commodity cycle and eventually trigger an increase in self-sustaining demand growth." Global industrial demand is rebounding, which suggests that 2009 will be the "trough of the Great Recession."

Canadian-based AJM Petroleum Consultants is forecasting prices to "steadily continue to recover with time horizon remaining the unknown...Until such time as there is an indication of a sustained U.S. recovery that would affect crude demand -- and until decreased drilling brings about a production decline in natural gas -- the current price increases may be setting us up for false hope -- just as it was in June 2008 when speculation, rather than a sustainable supply/demand equation, drove prices."

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