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Raymond James: Cruel Summer to Deliver 'Price Meltdown'

It's not a question of "if" but rather "when" the market will see sub-$3/Mcf natural gas, Raymond James & Associates Inc. analysts said in a Monday research note in which they took a bow for calling the bear market early and predicted more pain to come for gas producers.

Sifting comments heard at the firm's Annual Institutional Investors Conference in Orlando, FL, recently, J. Marshall Adkins and Pavel Molchanov said, "[T]he only real debate is over how ugly 2010 will be."

Noting that they called a gas price collapse in mid-2008, the analysts said investors now are equally pessimistic on gas prices. Booming production from shale plays has turned from blessing to curse as markets have dried up due to the recession, leading to a cavern-busting near-term outlook for gas storage injections.

Earlier in March Raymond James said summer could end with 4.6 Tcf in "theoretical" inventory. (Peak U.S. working storage capacity is about 3.79 Tcf, according to the Energy Information Administration, which concedes that the figure is only an estimate based on previously reported storage levels.) Analysts at LCM Commodities said recently storage could hit 4.1 Tcf by the end of October.

"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," the Raymond James analysts said. "To ensure such shut-ins, summer gas prices will need to fall to $2.50/Mcf and perhaps even lower."

Even assuming robust cuts to the rig count -- which is falling "fast and furious," with Raymond James expecting 1,000 to ultimately be cut from a peak of 1,600 gas rigs -- gas supply won't decline year-over-year until after June, the analysts said. "Unfortunately this is too little, too late. The reality is that U.S. gas producers will be shutting in production this summer. We have found very few investors who fundamentally disagree with this outlook, though there are some slight differences of opinion over precisely how much gas can be squeezed into storage and hence how much will need to be shut in.

"In stark contrast to a year ago, discussions at our conference clearly suggest that the market has -- finally -- woken up to the likelihood of a gas price meltdown this summer."

All of this has led producers to spurn drilling, of course, as they work to bolster balance sheets with the expectation that borrowing bases are in for hefty cuts this spring. "Plenty of producers are focusing on drilling only the acreage that they are at risk of losing due to lease expirations, and the new trend of drilling but not completing wells also got considerable airtime at the conference," the analysts said.

And 2010? The analysts said it's too early to get excited as domestic supply and demand and the level of liquefied natural gas imports all remain to be seen.

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