Producers are laying down natural gas rigs in some of the most prolific basins in the United States, but it’s not coming fast enough to eliminate reserves growth, which could lead to an all-time inventory high by this time next year, according to Barclays Capital.
Barclays pegged gas prices in 2009 to average $6.36/MMBtu, with a rebound unlikely before the spring of 2010. Drilling is expected to remain slow in 2010, which would slow output, but “the storage overhang is unlikely to be worked off until mid-year” 2010, said Barclays’ George Hopley, Biliana Pehlivanova and Michael Zenker.
The price weakness forecast next year may not rebound before well into 2010, when the analysts see prices averaging $7.16/MMBtu.
The “sell-off across all asset classes, the rapid decline in oil prices in particular, and the now global slowdown of the economy certainly played a role, [but] the downward slide of cash and forward [gas] prices is mainly driven by the growing imbalance between supply and demand,” the analysts wrote. “More specifically, the seemingly unstoppable growth in U.S. supply has set the direction for prices and continues to drive our price outlook going forward.”
Supply/demand balances “are looking increasingly loose,” said the trio. Between January and August, gas “output was up a healthy 4.3 Bcf/d year/year (y/y), compared with a 2.2 Bcf/d annual up-tick in 2007.” The growth was highest in Texas and the Rockies, where unconventional fields “are yielding wells with higher initial flow rates and slower second- and third-year declines than those for the average conventional wells.”
Barclays estimates “now point to domestic natural gas production growth of 3.23 Bcf/d in 2008 and growth to continue into 2009.”
Gas storage levels by the end of March may be “just over 1.8 Tcf, assuming 10-year normal weather,” said Hopley and his team. “In a typical injection season, the market usually adds about 2 Tcf to inventories between April and October (the summer build averaged 2.04 Tcf in 2001-07). A similar build would put the end-of-October 2009 storage level at an all-time high of 3.8 Tcf, which would serve as a test to the nation’s working gas storage capacity.”
Partially offsetting U.S. gas growth will be “pronounced weakness” in U.S. gas imports, noted the Barclays analysts. Canadian pipe imports and liquefied natural gas (LNG) receipts “have waned this year, together reducing supplies nearly 2 Bcf/d on average compared with 2007. But the drivers of the declines for the two sources of imports diverge, and while Canadian imports are expected to continue falling, with 2009 averaging 0.75 Bcf/d lower than 2008 levels, the y/y comparisons for LNG will improve, albeit marginally, in 2009.”
Even though nameplate liquefaction capacity is set to grow 6.1 Bcf/d next year with new facilities ramping up, U.S. LNG imports are seen averaging 1.2 Bcf/d in 2009, allowing for a y/y increase of 0.25 Bcf/d, “as occasional spot cargoes are pushed into the U.S. despite uncompetitive prices during seasonal troughs in demand in Europe and Asia.”
Natural gas demand is unlikely to show strength in the coming year, but weather poses an upside risk, the analysts noted. Overall in 2009, Barclays is forecasting gas demand to average less than 0.1 Bcf/d higher y/y, and to strengthen nearly 1.0 Bcf/d in 2010 as the economy recovers.
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