The bloodbath in the U.S. natural gas market isn't over, and an unprecedented 800-1,000 Bcf will need to be shut in this summer to stop what is sure to be a continuing decline in gas prices, Raymond James & Associates Inc. energy analysts said Monday.
Confirming what he said at a San Francisco conference last month (see Daily GPI, Feb. 25), analyst J. Marshall Adkins and his colleague Collin Gerry said in their latest "Stat of the Week" that the rig count has to come down more and gas prices "must fall below $2.50/Mcf" this summer to begin to rebalance the market.
"A string of bearish inventory numbers over the past few weeks suggests the market is now oversupplied by over 7 Bcf/d relative to last year," they wrote in a note to clients. "The combination of surging U.S. gas supply and falling gas demand has driven an unprecedented bearish shift in U.S. gas supply/demand fundamentals."
The Raymond James team, which late last year cut its 2009 average natural gas price forecast to $5/Mcf, now has slashed the forecast to $3.75/Mcf. The analysts forecast that gas prices will average $2.50/Mcf by 3Q2009.
"Over the past year, we have been concerned over the surge in shale-related gas supplies," said Adkins and Gerry. "Now we also have a demand problem. The combination of falling industrial, gas-fired electric and residential demand adds up to year-over-year demand destruction of around 2-3 Bcf/d (or about 4%). If we assume some fuel switching away from coal and to gas, net gas demand in 2009 (defined as Nov. 1 through Oct. 31) should fall by about 2 Bcf/d."
The U.S. gas rig count has fallen faster than the analysts had anticipated. However, "the rigs that have been laid down are going to be the least productive gas rigs. Even if we assume only a minimal increase in LNG [liquefied natural gas] imports, we still believe net U.S. gas supplies will be up 2 Bcf/d in 2009."
Theoretically, said the duo, the U.S. gas market could end the summer with 4.6 Tcf in summer-ending gas storage. "Since the U.S. has nowhere near that much gas storage, we believe the market will need to shut in 800 to 1,000 Bcf of natural gas this summer. To ensure such shut-ins, summer gas prices will need to fall to $2.50/Mcf, and perhaps even lower."
Recent gas storage data "confirmed that U.S. natural gas supply/demand fundamentals are now much worse than even we thought," they wrote. "The biggest change over the past several months has been the slowdown in industrial, residential and power-related gas demand. Over the past couple of months, there has been over 6 Bcf/d more gas in the system this year than last year (i.e., 6 Bcf/d looser on a weather-adjusted basis). Over the past few weeks U.S. gas storage data has deteriorated even further, and now suggests that the market is oversupplied by 7-8 Bcf/d (looser)."
Even with a relatively cold winter and several supply interruptions, the Raymond James duo now expects gas storage to end the withdrawal season "with roughly 1,700 Bcf in storage," which is more than 450 Bcf above last year.
Which direction prices will go in 2010 remains unclear. A lower gas rig count "should help U.S. gas prices by 2010, but it is still too early to get excited about 2010 gas prices," said Adkins and Gerry. However, with uncertainties in the economy, questions about LNG imports and better rig productivity, "our 2010 confidence level remains low."
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