A "well saturated" market and sustained drilling led Bank of America Merrill Lynch (BofA) to join other energy analysts in cutting the price forecast for U.S. natural gas in 2011.

In a report the investment bank's energy team reduced the price outlook to $4.60/MMBtu from $5.00. A month ago the analysts had warned that their $5.00 price forecast carried "downside risks."

The revised BofA forecast follows similar downgrades by energy analysts in recent weeks. Deutsche Bank's chief economist said last month prices may not reach $6/Mcf before 2015 (see Daily GPI, Nov. 19). Last week Goldman Sachs cut its gas price forecast for 2011 to $4/MMBtu from $5.25 (see Daily GPI, Dec. 6a).

For the week ending Dec. 3, the number of rigs searching for gas in the United States rose by eight from the week before to 961. There were 213 more gas rigs in operation at the end of last week than a year ago, according to Baker Hughes Inc. (see Daily GPI, Dec. 6b).

The BofA team said the domestic gas rig count should fall by more than 200 rigs to about 750 by the end of 2011.

"Rigs need to fall by at least 20-25% over the course of 2011 in order to significantly slow the pace of new supply and thus support prices," said the analysts. From 2013 and beyond, there is an "upside" to gas prices, but for now, forward prices are too low.

By the investment bank's calculations, the gas storage inventory could hit 2 Tcf by the end of March, which would contribute to increased price volatility in the coming year. In addition, industrial gas demand growth fell to 4.6% in October from 14% in May, which indicates the need for more coal-to-gas switching by power generators to balance supply and demand.

Based on the combined factors, the U.S. gas balance "will remain weak in 2011, given low demand, record inventory levels, strong supply growth and continued drilling activity," said analysts.

The sustained low domestic gas prices also will result in reduced Canadian and liquefied natural gas (LNG) imports, said the investment bank. In the Northeast Canadian gas imports have fallen by about half from a year ago to less than 1 Bcf/d, the report noted. Meanwhile, LNG shipments will head "elsewhere" in 2011.

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