Sometimes what goes down keeps going down. That would appear to be true of natural gas prices. Wednesday analysts at Goldman Sachs cut their 2011 New York Mercantile Exchange (Nymex) gas price forecast to $4/MMBtu from $5.25/MMBtu. And just a day earlier Barclays Capital analysts were asking "Who stepped on my forward curve?"
"...[W]e expect prices to decline to $3.75 in 3Q2011," the Goldman team said. "In addition, we introduce our 2012 natural gas price forecast at $4.25/MMBtu."
And the good news for producers is that prices that low "will motivate coal-to-gas substitution [by power generators] in the order of 2 Bcf/d in 2011 and 1.7 Bcf/d in 2012," the analysts said. That should allow the market to absorb projected production growth of 1.4 Bcf/d and 0.9 Bcf/d in 2011 and 2012, respectively without blowing out any storage caverns, the Goldman analysts said.
The Barclays take on the market is that "sellers have overwhelmed buyers." In order to facilitate their hedge programs, producers are having to sell further out on the forward curve; meanwhile, buyers are turning away.
"The curve flattening is not over," Barclays said, "if producers continue to sell forward to hedge and if buyers remain on the sidelines. Plus, continued drilling without a price recovery has the unintended consequence of convincing market watchers that costs, and therefore prices, must be lower."
In other words, talk of efficiencies in the gas patch can be a dangerous thing for producers. "...[I]f producers tout an ability to make money in a $4/MMBtu market...then why should longer-term prices trade above $4?
"In the face of depressed prices, several producers have stated that they are prepared to ride out a period of even lower prices," Barclays said. "Is it any wonder that these statements, collectively, have reset the market view on gas production costs, and therefore prices?"
At Goldman, economists are warming to a U.S. economic recovery, raising their 2011 outlook to 2.7% growth and introducing an above-trend growth forecast of 3.5% in 2012.
"This would normally suggest a tightening of the natural gas market balance," the Goldman analysts said. "However, we believe that the U.S. natural gas market will continue to face significant supply-side headwinds in 2011, which will likely see the natural gas surplus increase in 2011 rather than decline."
And where there is tightening of gas markets, U.S. producers will be missing the boat. Liquefied natural gas (LNG) buyers outside of the Organization for Economic Co-operation and Development will increase their demand and help eliminate an LNG supply glut over the next couple of years, according to Goldman's analysis.
"This will likely keep international markets disconnected from the oversupplied U.S. market, driving international gas prices up closer to oil-indexed natural gas prices by the end of 2012," the firm said.
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