Natural gas bulls looking ahead to next year are a little like Goldilocks after she broke into that house: they have three bears to deal with, or rather "bearish factors," as energy analyst Stephen Smith calls them.

While this year is likely to wind up with slightly fewer than normal heating degree days (HDD), it will be significantly above normal in its number of cooling degree days (CDD), making 2010 the first or second highest year in the last 13 for combined degree days, Smith wrote in Stephen Smith Energy Associates' latest Monthly Energy Outlook.

The extreme July heat experienced by much of the country has helped to set this year up as a high hurdle for 2011 to meet on the demand side, said Smith, who cut his 2010 Henry Hub bidweek average price estimate to $4.65/MMBtu from $4.70/MMBtu and his 2011 estimate to $5.00/MMBtu from $5.50/MMBtu.

Days before Smith's latest note, Credit Suisse Commodity Research Director Teri Viswanath came out with a 2011 estimate of $5.25/MMBtu, which is right between where Smith was on 2011 and where he is now (see Daily GPI, July 28).

"On a net basis we are more bearish about the 2011 supply-demand balance than we were in our previous monthly outlook," Smith wrote. "We have assumed average 1997-2009 HDDs and CDDs for our 2011 demand forecast, but...the [National Weather Service January, February and March] HDD outlook for 2011 is for milder-than-normal weather." That would be bear No. 1.

"The second 'more bearish than last month' factor relates to the economy," Smith wrote. While the hash of jobs, housing, gross domestic product, durable goods and other data gets sifted by pundits daily, "it does appear that the pace of the economic recovery has slowed," Smith wrote.

And the third bearish factor: producers just refuse to back off on drilling. "...[T]he U.S. rig count is not declining at the pace we had anticipated -- in fact, it has not been declining at all," Smith wrote. "Our current production model was run using a 0.5% monthly total-gas-rig decline rate through December 2011 (as compared with our previous estimate of 1 1.2% monthly decline). The result was stronger average gas production in 2011 than we had estimated last month."

Smith also noted the significantly changed profile of the gas rig count. When the count peaked in August 2008, 31% of gas rigs were drilling horizontally. But by July the horizontal share of the count had climbed to 64%, which according to Smith, means roughly twice as many rigs plying gas shale plays. He noted that horizontal wells have much stronger "front-end" production per dollar invested than vertical wells.

Citing Energy Information Administration figures for April's and May's gross gas production, Smith noted that Lower 48 onshore gross production grew by 0.62 Bcf/d from a March level of 58.04 Bcf/d. "This two-month growth rate would annualize to a 3.8 Bcf/d increment for Lower 48 onshore production," he said. "This production growth is likely to continue when the summer heat bonus is gone. Absent hurricane effects, we expect a fall gas storage peak which meets or exceeds last fall's peak storage.

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