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Energy Analysts Look to 2010 For Gas Price Gains

Natural gas prices through the end of September are expected to average $3.80/MMBtu, while prices in the fourth quarter will average $5, energy analysts with Bank of America-Merrill Lynch (BA-ML) said in a note to clients. However, if gas storage levels continue to climb, analysts said Henry Hub prices could dip below $3.

BA-ML's latest forecast is down from the financial firm's March outlook, which had pegged 3Q2009 prices at about $4.20/MMBtu and 4Q2009 prices of around $5.90. The long-term forecast for gas remained unchanged: BA-ML still expects 2010 gas prices to average $6/MMBtu. Analysts with SunTrust Robinson Humphrey/the Gerdes Group (STRH) on Friday predicted that gas prices could hit $7 or more next year. Meanwhile, the Energy Information Administration last week said the Henry Hub gas spot price may reach $5.48/Mcf in 2010 (see related story).

"Steep depletion rates in conventional fields will pull U.S. natural gas production toward unsustainably low levels by the first quarter of next year," BA-ML analysts said. "Uncertainty around global LNG [liquefied natural gas] supply volumes remains the biggest risk to our more constructive view for U.S. natural gas prices next year."

Several factors are "supportive" of U.S. gas looking forward, said the analysts. "One is the economic recovery and fears of a rush of LNG imports receding. With natural gas production falling, a bullish sentiment was created as oil prices rose $75 and that in turn pushed Nymex [New York Mercantile Exchange] gas prices above $4."

Gas supplies "are still high compared to demand, and an equilibrium is yet to be reached," wrote the team. A production slowdown "is now finally visible," but "the level is still too high relative to demand."

Lower production costs accelerated output in the big domestic gas shales, and "with a storage crisis, spot prices may sink," said the BA-ML team. "The weakness in these producing regions is spreading to some demand centers as well. The newly expanded 1.8 Bcf/d Rockies Express East pipeline is now extended into Ohio, spreading some of the gas sourced from the oversupplied Rocky Mountain region farther East to some major consuming centers in the Midwest.

"Imports from Canada are expected to increase and higher imports will make it tough to rebalance overall U.S. supply in the absence of further production curtailments" (see related story).

Coal-to-gas switching by power utilities helped to create incremental demand for natural gas, and industrial gas demand is "expected to pick up" in several sectors, including aluminum and plastics, the BA-ML analysts said.

"Gas price weakness" is "likely to persist into November," wrote the STRH team.

"Following our latest model revisions, we anticipate 700 gas rigs in operation on average the latter third of this year, a 50%+ year/year (y/y) decline in drilling activity," wrote the STRH team. "Consequently, U.S. gas supply should decline 3 Bcf/d-plus (6%) y/y by year-end and reach a nearly 6 Bcf/d (10%) peak-to-tough decline next summer assuming an increase in drilling activity, which accelerates at the beginning of next year.

"The gas rig count should average almost 800 rigs this year and increase 20-25% next year to 975 rigs on average, with 1,100 gas rigs on average necessary" in the second half of 2010," STRH analysts said.

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