With the U.S. natural gas rig count down dramatically, domestic gas supplies should fall by 2 Bcf/d or more, or by 4%, by year's end, setting up a peak-to-trough decline of almost 5 Bcf/d, or 9%, by the middle of 2010, analysts with SunTrust Robinson Humphrey/the Gerdes Group (STRH) said last week. Barclays Capital analysts, however, said it would take colder-than-normal winter weather to bring storage to a neutral level.
"This year's experience suggests 800 gas rigs and $6 gas prices [are] not sufficient to maintain U.S. gas supply," wrote STRH's John Gerdes, Cameron Horwitz and Ryan Oatman. "In '09, the U.S. gas rig count should average 800 rigs and U.S. gas supply should experience modest erosion during the year. At the same time, U.S. gas producers should realize a $6 hedge-adjusted Nymex [New York Mercantile Exchange] equivalent average gas price and remain 10-15% free cash flow negative for the year."
Assuming even a "modest" improvement in industrial productivity, for 2010 "we conclude that a 900-1,200 gas rig count and $7-8 natural gas prices are necessary to maintain U.S. gas market equilibrium," the trio wrote.
U.S. gas-fired power output this year "has been immune to weak economic conditions" because more gas-fired generation is being used by Southeast/Mid-Atlantic power producers "to the detriment of comparatively priced coal-fired generation," they wrote. From September through the end of this year, "industrial gas demand should be only slightly below last year given easy hurricane/economic comparisons."
If U.S. economic recovery continues at a moderate pace through 2010 and assuming oilfield service price inflation of 10%, an $8/MMBtu gas price "appears necessary" for 2011, said the STRH analysts. "Accordingly, the gas rig count should average 1,025 rigs in '11. Given the further and meaningful uplift in activity, well/rig productivity is expected to plateau."
Echoing other observations about the abundance of domestic shale resources and improved drilling technologies, the STRH analysts estimated that U.S. onshore productivity improved "an astounding 30% in '08 and should improve a further 15% this year" even though U.S. gas-directed drilling slightly fell in early 2008.
In related research, Barclays analysts said a cold start to the winter season could snap natural gas storage inventories lower and send prices higher but said it may take more to bring the overflowing storage situation back to a neutral level.
James Crandell, Biliana Pehlivanova and Michael Zenker, writing in Barclays' Natural Gas Weekly Kaleidoscope, said that over the five-month withdrawal season of November through March, average winter temperatures in recent years have been 6.4% warmer than the 30-year average, which has resulted in fewer heating degree days.
Only a 10% colder-than-normal winter over the 30-year average, they said, would bring storage balances "back to still near-record levels of last year."
If storage at the end of winter heating season is near last year's levels, gas prices could push above $5.20/MMBtu in early 2010, said the Barclays team. But they warned that even if cold weather sends prices higher, "there remains the risk that the persistent price strength limits the competitiveness of gas compared with coal."
For the market to avoid a record storage finish in 2010, "gas must compete with coal next year to boost gas burns in the power sector," said the trio. "Thus, the longer gas prices are held higher owing to cold weather, the more risk there is that storage injections build at an even higher rate than we expect with our 2010 price outlook, creating greater downside risks" in the second half of next year.
"In other words, a cold-weather-driven price surge should be self-correcting later in 2010 if the price strength remains."
However, an "average" withdrawal would leave gas inventories "very full," said Crandell and his colleagues. With a range of nearly 1,000 Bcf between the high and low in their withdrawal season forecast, "there is clearly a lot at stake in winter weather variation."
Only a gas withdrawal of more than 2,300 Bcf this winter "would bring inventories in-line with normal end-March levels, an occurrence that has happened in just two of the past eight winters, when cold weather coincided with a tight market."
The March-April spread currently "is trading around zero, implying the market is oversupplied and giving the perception that even if cold winter temperatures do materialize, the market has a surfeit of gas available," the analysts said. Prices thus "have limited upside potential this winter on account of weak underlying demand. Temperatures would have to be much colder-than-normal...on a consistent basis to pull inventories out of oversupply and to normal levels."
At current forward curve levels, gas prices "would encourage power generation from coal at the expense of natural gas and provide attractive economics for producers to rekindle drilling -- factors, which would, in turn, push prices lower."
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