The U.S. natural gas market may be pricing 2010 based on forecasts for a strong recovery in demand and declining supply, but a modest recovery is more likely next year, with prices averaging $5.05/MMBtu, Barclays Capital analysts said last week.
The sharp cut to the domestic gas rig count isn't enough to prompt a "robust " recovery, and other factors also will play into lower-than-anticipated gas prices in 2010, wrote analysts James Crandall, Biliana Pehlivanova and Michael Zenker.
"As we look into 2010, we see incrementally more supply and less demand, versus our last bottom-up examination," wrote the trio. "Where our balances had previously projected a bullish storage finish to the injection season in 2010, and for supply to underrun demand" by the second half of next year, "our revised balances now project another robust storage fill in 2010, to about the same level expected for 2009."
Demand "will fail to play a role in helping to revive prices next year, which is somewhat counterintuitive given that we expect the economy to recover," said the Barclays team.
According to Barclays estimates, total domestic gas demand in 2010 will fall by 0.6 Bcf/d, or be 1% below 2009 levels, "which itself amounts to 2% below 2008 levels. If our forecasts are correct, natural gas demand in 2010 will be nearly 2 Bcf/d below 2008 levels, retracing back to 2004 levels."
The domestic gas rig count already has bottomed out and the count is moving slowly higher, they said. "We now project the average number of rigs running in [the second half of 2009] to be about 36 rigs more than our previous forecast. This adds a slice of supply for 2009 and into 2010."
The Barclays team is maintaining a $4/MMBtu price forecast for 4Q2009, with prices rising around 50 cents in the first three months of 2010 to $4.50/MMBtu. "Thereafter, we expect prices to moderate," with gas prices in 2Q2010 and 3Q2010 averaging around $4.75. By the last three months of 2010, prices are forecast to average around $5.50/MMBtu.
"Obviously there are weather risks and other wild cards in the mix that can change the balance," the analysts said. "But there is a vicious feedback loop lurking: if cold weather works off inventories and raises prices, we would expect coal switching to decline and LNG [liquefied natural gas] imports to grow. The market appears boxed in for 2010 from today's vantage point."
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