Even assuming "robust" economy-related demand for natural gas in 2011, it still looks ugly for prices through the coming year, Raymond James & Associates said Monday.
In their Energy Stat of the Week, analysts J. Marshall Adkins, Pavel Molchanov and Christopher Butschek said the gas market in 2011 will need more than a stronger economy. It also will need more coal switching or production shut-ins to help prices, they wrote.
The Raymond James team revised its 2011 gas price forecast by 50 cents to $4.25/Mcf, which is below an expected 2010 average price of $4.50/Mcf. "Similarly, our long-term-gas forecast will be reduced from $6.00/Mcf to $5.50/Mcf." Over the coming five years the analysts expect gas prices to be range-bound between $3.00/Mcf and $6.00/Mcf.
The gas rig count is "remaining stubbornly high in the face of low gas prices," which suggests that "supply growth will continue to happen if prices are anywhere near $6.00/Mcf. Consequently, we've lowered our long-term natural gas price forecast to $5.50/Mcf, with bias to the downside."
The team noted that it expected weak gas prices but "we didn't see the higher rig count coming." The analysts expected the rig count to peak around April and slowly roll over, ending 2011 below 800 rigs. However, six months later the gas rig count remains steady at just under 1,000 rigs.
"Even though U.S. gas supply growth has recently flattened, we believe the stagnation is bottleneck-related" to, among other things, pipelines and a shortage of hydraulic fracturing crews, which would mean the slowdown is only temporary.
The outlook for gas prices, wrote Adkins and his colleagues, "remains unrelentingly ugly." In the past six months "prices have been range-bound between $3.75/Mcf and $5.00/Mcf...Moreover, the key supply/demand fundamentals in 2011 -- core supply, industrial demand and electrical demand -- look even worse today than they did six months ago. If our forecast is correct, $5.00/Mcf natural gas may soon seem like the good old days."
The gas market got no relief this summer, noted the team. "The dog days of summer have been simply abysmal. Cooling degree days in July and August were 12% above normal and a whopping 17% above last year, or the hottest summer this millennium.
"While weather-related demand drove U.S. natural gas prices over $5.00/Mcf in early August, prices have since fallen below $4.00/Mcf as summer heat dissipates and an underwhelming hurricane season begins to draw to a close. To add insult to injury, gas fundamentals should get even worse in 2011."
Four key variables are in Raymond James' bearish forecast. On a y/y basis November to November, the analysts are forecasting:
If those variables are correct, the domestic gas market would be more than 2 Bcf/d "looser," with more gas in the system, on a y/y basis, which in turn would yield to "theoretical summer-ending storage of over 4.2 to 4.4 Tcf. This means the market will need to price out about 300 Bcf, or roughly 1 Bcf/d of natural gas supply..."
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