U.S. natural gas output will fall this year, but global supplies in the form of liquefied natural gas (LNG) are about to experience the largest incremental addition of liquefaction capacity in a single year, Barclays Capital analysts said. Nameplate liquefaction capacity is estimated to jump by 5.6 Bcf/d this year, and where that capacity lands is posing “the greatest uncertainty” for U.S. supply/demand balances in this summer’s injection season.

“In addition to incremental supply, weakening LNG demand in Europe and Asia over the past three months has likely exaggerated the global glut,” wrote Barclays analysts James Crandell, Biliana Pehlivanova and Michael Zenker. “Exactly how much LNG comes to U.S. shores, however, will depend not only on excess volumes globally, but also on the relative strength of U.S. prices.”

The trio’s analysis of the current forward curves on the two sides of the Atlantic Basin, for the New York Mercantile Exchange and the UK National Balancing Point, “suggests that incremental flows to the U.S. should be strongest in 3Q2009, with a pickup likely as early as 2Q2009. Given the uncertainties that are playing out in the global natural gas market, the range of outcomes for LNG imports to the U.S. is unusually wide…” with the most uncertainty this summer.

The Barclays team estimates that U.S. LNG imports will average 2 Bcf/d in 2Q2009, 2.6 Bcf/d in 3Q2009 and 2.8 Bcf/d in the final quarter. “These estimates, however, could change significantly with shifts in the relative forward pricing of Atlantic Basin markets, relative strength of European and Asian demand, and more potential delays of liquefaction plants scheduled to come on-line.”

U.S. gas producers have been laying down rigs at a quick clip since last September, with the rig count now about half of what it was at the 2008 peak, according to Baker Hughes Inc. However, Barclays and other energy analysts have noted that the steep pullback in U.S. drilling has been accompanied by an equally sharp decline in demand, particularly in the industrial sector.

Domestic gas output is close to tipping into sequential decline, according to Barclays, but analysts expect supply to be above 2008 levels until the second half of 2009. Canadian imports continue to run below 2008 levels, but if more LNG imports begin to arrive later this year, that would compensate for fewer imports.

“Our projections imply that inventories could stand at 3.9 Tcf at the end of the summer 2009 injection season, providing a test of U.S. capacity to store gas, with all the attendant bearish implications,” wrote Crandall and his colleagues.

Chesapeake Energy Corp., a top domestic gas driller, has taken heed. Chesapeake late last month curtailed 7%, or around 240 MMcfe/d, of its gross gas and oil production through March (see Daily GPI, March 3), and in the past six months it’s cut 75% of its conventional drilling. However, drilling now will be reduced by 85% over the coming two months, McClendon told attendees on Tuesday at the Howard Weil Energy Conference in New Orleans.

“You simply cannot make money in a sub-$7-8 environment,” McClendon said. He’s seen signs that the gas supply and demand market may rebalance by 3Q2009.

“You are beginning to see a demand response to prices,” McClendon told reporters. “I think it’s coming out of the coal stack. I think we are beginning to see electrical generation members come our way.” Still, he doesn’t have confidence that the gas rig count will rebound this year.

The gas rig count also is unlikely to bounce back any time soon, said the CEO. “We would be very surprised to see much of a rig count increase in 2010 and 2011, even with a healthy rebound in prices.”

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