Raymond James & Associates Inc. last week appeared to take a step on the natural gas bull side as analysts slightly lifted their 2010 forecast for U.S. natural gas prices to $4.50/Mcf from $4.25.
However, despite the modest increase in prices, “we continue to believe that, under more normal weather conditions, U.S. gas supply will overwhelm gas demand growth and drive prices below $4.00/Mcf later this summer,” John Freeman, Kristal Choy and Kevin Cabla wrote in the latest Stat of the Week.
Raymond James in April cut its gas price forecast for the second time of the year to $4.25/Mcf from $5 (see NGI, April 19). In January analysts had forecast gas prices in 2010 to average $5.50.
The cuts in April came “because of our fear that a U.S. gas supply surge this summer would overwhelm summer demand, flood gas storage and drive gas prices low enough to force shut-ins,” said Freeman and his team. “Since reducing our gas price forecast, U.S. gas supply has spiked upward but the demand side of the equation has also surpassed our previous expectations.
“Specifically, the combination of rising petrochemical-related demand, increasing industrial demand from inventory restocking and higher weather-related gas-fired utility demand has largely offset stronger than expected U.S. gas supplies. This has left gas bulls with a glimmer of hope, and gas prices have remained stubbornly high.”
The trio “trued up” its 2Q2010 gas price forecast to $4.10/Mcf from $3.70 and “are increasing our 3Q2010 gas forecast of $3.50/Mcf to $4.15/Mcf.”
“Adding it all up, we still expect to average $1.25 Bcf/d looser this summer (or storage injections of 250 Bcf more than last year),” said the analysts. “This puts theoretical summer-ending storage at over 4 Tcf, and implies 100-200 Bcf of incremental shut-ins/production curtailments. Last year natural gas prices had to crater to below $3.00/Mcf to force 100 Bcf of shut-ins, and we still expect a repeat of the same gas price collapse story later this summer.”
Onshore gas producers appear undeterred by the gas prices, with the gas rig count gaining four new net rigs for the week ending July 9, according to Baker Hughes Inc. No oil or gas rigs were added in the Gulf of Mexico, which was down to 31 working rigs.
Barclays Capital’s energy team said last week a “plunge in drilling is one of the few events large enough to fix the structural oversupply in the gas market.” The “main catalysts for a reduced rig count,” they said, could be:
“These events all represent ‘tailrisk’ events to the gas market but could precipitate a pullback in drilling,” said the Barclays team. However, even if drilling were to fall 60% from current levels, production would fall by only 1.8 Bcf/d in 2010.
“As we estimate that gas balances need to work through 3 Bcf/d of coal displacement in order to see much higher prices (i.e., $8 gas), we view the risks to production as being skewed to the upside. Thus, the risks to prices remain to the downside.”
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