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Moody's Sees 'Downside Risk' to Natural Gas Prices

Worldwide economic growth is slowly beginning, which is leading to rising demand for petroleum products, but high inventories of energy products will temper prices, especially those for natural gas, Moody's Investors Service said last week.

The credit ratings agency updated its assumptions for natural gas and oil prices used by its analysts to assess credit quality in the energy industry, reflecting Moody's expectations for "continued, albeit weak," economic growth and an abundance of energy supplies.

Moody's Henry Hub gas price forecast is unchanged from an earlier forecast, with prices seen averaging $4.50/MMBtu in 2010, $5.00 in 2011 and $5.50 beyond 2011.

West Texas Intermediate crude oil prices, however, were set higher, with Moody's forecasting a price average of $75/bbl in 2011 and $80/bbl in 2011 and beyond. This is up from a previous assumption of $50/bbl in 2010 and $60 over the medium term.

"Our increased oil price assumptions reflect the emerging economic recovery, but also technical factors that have led to higher prices than supply and demand would indicate," said Moody's Senior Vice President Steve Wood. "We are more concerned with the downside risk to natural gas prices given record storage levels going into the heating season and little sign of significantly lower production levels."

Moody's noted that since its previous guidance, oil prices have risen in line with improved worldwide demand and OPEC production cuts. Gas prices, however, have not.

"Relatively weak natural gas prices will have the greatest impact on smaller independent E&P [exploration and production] companies," Wood said. "Current spot prices for gas continue to be lower than the typically quoted benchmark prices."

Moody's updated stress-case guidance prices, which would reflect worse-than-expected down cycle economic conditions, are $50/bbl for oil and $3/MMBtu for natural gas. The stress test analysis is used to examine what levels of cash flow companies may be expected to generate at these lower price levels and whether they would be able to reinvest sufficient capital to replace and grow production.

Moody's price assumptions are not intended to forecast market prices but to serve as a baseline approximation to evaluate the relative risks associated with a given E&P company's debt, based on that company's expected near to medium-term operating and financial performance.

The world's biggest economies will see growth return over the next year, according to Moody's. "This growth could be somewhat weak in the U.S. and Europe, but more powerful in Asia, and particularly China -- increasingly a driver of worldwide oil demand."

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