Energy analysts in recent days piled on their bearish outlooks for domestic natural gas prices through 2011, with two teams slashing forecasts to $4.00/Mcf for the final three months of this year.
The negative forecasts by FBR Capital Markets and Barclays Capital analysts coincided with a report by Moody's Investors Service, which said gas prices may have bottomed, but any "significant" improvement is unlikely through 2011 (see Daily GPI, Oct. 21).
FBR Capital Markets analysts Rehan Rashid and Saurabh Lele said they now expect gas prices in 4Q2010 to average $4.00/Mcf, which is 50 cents lower than their earlier forecast. However, they adjusted higher their crude oil price estimate to $83/bbl from $76. The FBR team maintained its 2011 gas price estimate of $4.50/Mcf and assumed a crude oil price of $83/bbl.
There were "predictable drivers" in 3Q2010, and oil-exposed names outperforming their natural gas counterparts by 15% in 3Q2010, the FBR duo noted. To date in 4Q2010, oil-exposed equities have outperformed natural gas by 6.8%.
"Given natural gas fundamentals, we expect crude oil to continue to outperform," said the FBR analysts. "What the market wants to see from natural gas shale names is clarity toward capital allocation for natural gas projects during 4Q2010 and 2011. We expect guidance to suggest a continued shift in capital allocation toward crude oil."
Earnings discussions by producers in the next few weeks should indicate a shift in "capital allocation away from natural gas," with anticipation of a "meaningful shift next year," Rashid and Lele said.
"For 2011, anecdotal evidence and conversations suggest roughly about a 25% drop in capital allocated industry-wide for dry gas production. The key question, though, with regard to supply response would be, 'Does productivity growth offset a reduction in capital allocation?'"
Barclays Capital analysts slashed to their gas price forecasts through 2011.
"We expect only a moderate pullback of drilling in 2011, with the rig count dropping to 900 rigs by the end of next year," said Jim Crandell, Biliana Pehlivanova and Michael Zenker. "This would yield continued supply growth and leave 2011 more over-supplied than 2010. Perhaps more telling, it would carry supply momentum into 2012 as well."
The coming year is expected to be "littered with bearish indicators," said the Barclays trio. "The contrast of growing supply and falling demand should lead to inevitable downward price pressure. Storage is expected to finish winter at just over 2 Bcf/d (with symmetrical weather risk)."
Once again, they said, the power market will "be called on to mop up extra supply by idling coal plants in favor of those fueled by gas. Coal displacement is expected to return to 2009 levels (about 3.5 Bcf/d), and there will likely be plenty of gas to produce another record storage fill next year (4.0 Tcf)."
With all of those bearish factors in place, the Barclays team also slashed their 4Q2010 gas price forecast to $4.00/Mcf, which is down by 75 cents from an earlier prediction. The full-year 2011 gas price estimate now is $3.94/Mcf, which is 6 cents lower than they had expected.
In 2011 gas prices are expected to average $4.25/Mcf in 1Q2011, $3.75 in 2Q and 3Q, and $4.00 for the final quarter.
"Compared with the current rig count of 966, we expect drilling to drop only gradually through 2011, ending the year with 900 onshore, gas-directed rigs," said the Barclays trio. "While we think that the peak of drilling is likely behind us, any drilling cuts are likely to be slow and drawn out.
"Drilling activity is expected to run at levels similar to 2010...This rig rate would result in continued production growth through 2011 and significant momentum into 2012. U.S. gas production, which is expected to run 1.6 Bcf/d above last year's level this year, is forecast to grow an additional 2.1 Bcf/d in 2011.
"As was the case this year, the forecast for drilling activity will be the single most important driver of balances."
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