Weather surprises aside, North America’s growing natural gas surplus, low oil prices and an expected resurgence in liquefied natural gas (LNG) imports may keep Henry Hub prices below $7/MMBtu for “much or all” of 2009 and 2010, an energy analyst said in a review.
“We expect Henry Hub prices to trade generally in the $5.50-7.50/MMBtu range for much of the 2009-2010 period,” Stephen Smith Energy Associates (SSEA) of Natchez, MS, wrote in its monthly energy report.
After peaking in July, U.S. gas prices and world oil prices began their precipitous slide. “Since July, residual fuel oil (RFO) prices have declined by two-thirds, and the Henry Hub price has declined by half,” noted SSEA.
“The global financial panic and related concerns about global oil demand was the main driver for the crude oil and RFO price collapse,” the SSEA analysts noted. U.S. gas prices “declined partially in sympathy with oil prices, but also because of the extraordinary supply response from technology-driven U.S. gas shale plays over the past two years.”
Now as the end of 2008 approaches, the current price levels for oil and gas are “looking more like the new ‘steady state,'” the SSEA analysts noted. Part of the blame for lower prices was put squarely on OPEC, which on Monday delayed a decision until later this month about whether its member countries will reduce oil exports.
“Like it or not, OPEC must be part of the solution to the global financial crisis, which it helped create,” SSEA stated. “The recent $100/bbl reduction in oil prices reduces the world’s annual oil bill by $2 trillion…This massive OPEC-sponsored ‘stimulus program’ is as essential as the $700 billion U.S. rescue package, likely supplements to come, and the equivalent international rescue packages.”
Until global oil demand rebounds, more LNG imports will head to U.S. markets, SSEA predicted.
“This implies that the task of rebalancing supply and demand in the North American gas market is not simply a question of waiting for lower rig counts to reduce North American gas production,” wrote the SSEA team. “The time required for rebalancing the North American gas market is likely to be extended by the potential importation of excess global LNG supplies. We expect to see oversupplied North American gas markets for all of 2009 and probably all of 2010.”
SSEA’s gas rig outlook for 2009 and into 2010 also is as pessimistic as forecasts in recent days by other consultants and energy analysts (see Daily GPI, Dec. 1; Nov. 25). SSEA is forecasting “an ultimate decline of 15-20% before a new natural gas supply/demand equilibrium is established.”
The share prices of a lot of “quality” exploration and production (E&P) companies have been suffering along with everything else, noted SSEA. In its review, the analysts found that a lot of U.S.-based E&Ps are selling at discounts to their “conservative” net asset value/share when computed using with a combination of $45 West Texas Intermediate crude prices and $6 Henry Hub sustained. And that price slump is expected to continue for a while.
Although positive on the long-term prospects for gas prices and E&Ps — that is, 12-18 months out — SSEA analysts said that “in the short term, we are more pessimistic.” Traditional valuation “remains hostage to global financial markets in uncharted waters. The U.S. gas market appears oversupplied for 2009 and probably much of 2010.”
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