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Goldman Cuts 2010 Price Forecast

Goldman Sachs last week raised its 2010 gas production forecast and lowered its New York Mercantile Exchange (Nymex) price forecast for the year to $6/MMBtu from $7.30/MMBtu. The firm also introduced a 2011 Nymex forecast of $6.50/MMBtu.

"We believe these lower U.S. prices will also be reflected in global spot natural gas prices such as UK NBP [National Balancing Point] and spot LNG [liquefied natural gas]," Goldman analysts said in a research note. "Specifically, we expect the current gas glut in global markets, which in 2009 has been driven by weak industrial demand, to persist for the next few years, driven by a meaningful increase in LNG supplies."

The analysts predicted that UK NBP prices will remain disconnected from oil-indexed European gas prices and will be more aligned with U.S. prices. They cut their 2010 UK NBP price forecast to $5.70/MMBtu from $7.10/MMBtu and introduced a 2011 UK NBP forecast of $6.30/MMBtu. Analysts at Barclays Capital also have noted price convergence in the Atlantic Basin (see NGI, Nov. 30).

In the United States the analysts noted "resilient production" in the face of a collapse in investment and pointed to output from unconventional wells that has been much higher than expected. "The impressive productivity gains in unconventional gas implied in the publicized guidance given by E&P [exploration and production] companies has been likely driven by stronger-than-expected efficiencies in horizontal drilling, as exemplified in areas such as the Haynesville and Marcellus plays," they wrote.

The analysts also revised their predicted year-on-year change in production for 2010 to minus 2.7 Bcf/d from minus 4.3 Bcf/d. However, they said they do not expect coal-to-gas substitution among power generators will be necessary to keep gas storage caverns from bursting. "This is because we now expect lower U.S. LNG imports in 2010 to partly compensate for the higher U.S. production," they wrote.

The Goldman analysts said they think LNG producers will turn down their liquefaction plants in response to lower U.S. gas prices. "For next year we are lowering our expected [LNG liquefaction] utilization rate to 78% from 81% previously, up from an estimated 74% in 2009, resulting in approximately 1 Bcf/d lower supplies in the market."

Looking ahead to 2011 the analysts said prices will need to climb to $6.50/MMBtu to incentivize higher-cost drilling.

"Overall, we expect 2011 production to decline by approximately 900 MMcf/d, resulting from a 4 Bcf/d decline in conventional supplies, a 3.6 Bcf/d increase in unconventional gas production and roughly 460 MMcf/d year-on-year losses from the shut in and uncompleted wells added in 2010 but not 2011," the analysts wrote. "We believe this production path will lead inventories to a comfortable 3,775 Bcf by end of October 2011, likely providing enough supplies for the 2011-2012 winter, which will likely limit further upside to prices, barring extreme weather conditions."

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