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Analyst Sees Need for $7.50 Gas Price in 2010 to Spur Drilling

A $7.50/Mcf natural gas price in 2010 would provide the economic impetus to lift drilling activity enough to maintain market balance, even with an anticipated 20% decline in oilfield service price deflation, SunTrust Robinson Humphrey (STRH) energy analysts said Thursday.

However, the domestic gas rig count "should decline to 650 rigs by July and remain at about this level through year-end, implying an average gas rig count of 750-775 in 2009," analysts John Gerdes, Cameron Horwitz and Ryan Oatman said in a note to clients.

"Notably, we anticipate an additional 25% increase in well/rig productivity this year to account for the increasing percentage of horizontal activity and project rationalization," wrote Gerdes and his colleagues. "In '10, we expect the gas rig count will average 1,000-1,050 rigs, up 35% year/year (y/y) and approach 1,200 rigs" by summer 2010.

The STRH trio forecast 1.6 Bcf/d in liquefied natural gas (LNG) imports within the next few months because "European gas prices are now at rough parity with the U.S., reinforcing the potential for incremental U.S. LNG cargoes this summer."

On the demand side, STRH is forecasting a 2.75% contraction in U.S. economic activity in 2009, which "suggests industrial gas demand should decline 1.1 Bcf/d (6%) this year." Gerdes and his team noted that year-to-date, gas-fired power generation has been "relatively immune" to weak economic conditions because lower gas prices have led to gas-fired power beating out coal-fired generation.

"However, recent strength in gas prices should moderate this emphasis on gas-fired power generation," wrote the analysts. "Overall, we expect a 0.5 Bcf/d increase in gas-fired power generation this year due to early '09 competitiveness with coal and easy 2H09 [second half 2009] summer weather and economic comparisons."

In their review of gas market fundamentals through the rest of 2009 the STRH team said the numbers currently suggest "storage should exceed 3,800 Bcf in early November, which is close to the practical limit of U.S. gas storage. While the data suggests U.S. gas storage can accommodate 3,800-3,900 Bcf, there is some probability that this level of storage could put acute downward pressure on gas prices this fall.

"Notably, the gas market is currently 2-3 Bcf/d oversupplied y/y, though our analysis suggests the market should reach an inflection point in July and become increasingly underbalanced through late spring '10," assuming there is an increase in gas drilling activity next year.

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