The market may have given up on a 2010 recovery in natural gas prices, but "we think it's still to early to punt," analysts with Tudor, Pickering, Holt & Co. Securities Inc. (TPH) said last week.

"The next 40 days will likely move the confidence needle" after two Energy Information Administration (EIA) 914 supply reports are issued and storage injection reports are digested, said TPH's Dave Pursell, Brian Lively and Dan Pickering. "The most negative thing about 2010 gas is investor mind there is a decent chance of a whipsaw...and if it happens, it could happen soon.

"If we're wrong, gas will be something like $5-$5.50/Mcf" on the New York Mercantile 2010 strip "instead of the $7.50/Mcf we predict and stocks have just about baked this in."

The trio noted in their report that sentiment has shifted from "hopeful to negative" in the past two months because the EIA-914 supply data has failed to indicate meaningful declines, the U.S. gas rig count has continued trending higher, shale well output is improving and publicly held exploration and production (E&P) companies have reported "big" year/year domestic supply growth.

"This summer a minority subset of investors told us our $7.50/Mcf 2010 gas price deck was too low, while a majority were willing to make a small/medium recovery bet in gassy stocks," wrote Pursell and his colleagues. "Today a majority of folks need more than a 10-foot pole to touch anything related to natural gas."

The next EIA-914 production data report for September is scheduled for release on Monday (Nov. 30). TPH's supply model, based on basin-by-basin wellhead productivity, suggests total wellhead production in September should fall about 0.6 Bcf/d from declines and overall supply will be down more than that because of shut-ins.

It may be "hard to know exactly how much gas was voluntarily shut-in during September, but with $2/Mcf prices, it was probably at least 0.5 Bcf/d and could be higher," noted the analysts.

As for storage trends, winter weather should provide "much better storage data than we've had in the past six to eight weeks as storage approached full," they wrote, "so our visibility into the markets will improve noticeably as withdrawals begin" during the week ending Friday (Dec. 4).

The analysts noted that gas-fired power generation is growing, in part because it is taking share from coal due to low spot gas prices. "With trend line growth of 1 Bcf/d from February to August spiking to 3 Bcf/d of growth in September, we make the rough estimate that September '09 got 1-2 Bcf/d of higher gas demand from power, which is how we balance the information between storage and supply."

The TPH team is sticking with its domestic gas model, which shows a tighter market, even though there have been some monster initial production rates for Haynesville Shale wells and other "boomer" shale wells in the Marcellus and Eagle Ford plays.

"If U.S. gas supply doesn't decline as much as expected during 2009, it is likely because the conventional wells that are being drilled are noticeably better/high graded than we've assumed," they wrote. "In other words, E&Ps will have eliminated their junky wells and the remaining wells are noticeably better than the average."

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