Natural gas bulls shouldn’t anticipate higher prices going into 2011. They could, in fact, see even lower average prices than this year, Barclays Capital analysts said in a note to clients Tuesday.

After dropping their gas price outlook for 2010 a week ago (see Daily GPI, March 25), Barclays analyst Jim Crandell and colleagues Biliana Pehlivanova and Michael Zenker looked ahead to 2011 to determine what the markets may look like. What they see ahead is another bearish year.

“After growth in U.S. supply of 2.4 Bcf/d in 2009, despite the rig count cut of last year, U.S. supply is expected to grow an additional 2.7 Bcf/d in 2010,” they wrote. “This momentum carries into 2011, which features growth of 1.2 Bcf/d. Note that supply growth in each of these years is above trend-level demand growth in the U.S.”

Because this year’s supply growth will spill into the 2011 balance, it “points to another disappointing year for producers and another year of inflation-fighting natural gas prices for consumers. Balances are even looser in 2011 than in 2010, and the only way we get to a reasonable storage finish in 2011 is by driving coal displacement even higher in 2011.”

Forecasting the gas-directed rig count through 2011 “is clearly a fool’s errand,” said the analysts, but they wanted to highlight the role in gas balances. “Even assuming that the rig count falls to 700 and stays there, 2011 remains well supplied. This means that if the rig count does not fall that far, or if it recovers later in 2011, the market is even more awash in gas.”

Coal displacement needs to be about 30% higher in 2011 than in 2009, the trio estimated. “The combination of the implied competition with coal and high estimated levels of storage yields a bearish outlook for prices, leading to our forecast for 2011 of $4.10/MMBtu. 2011, therefore, is not a year of price recovery.”

The ability of producers to oversupply the market “could remain a market feature beyond 2011,” they wrote. “We have not prepared balances for 2012 and beyond, as there are too many moving parts, but remain convinced that producer discipline will be key to price outcomes, as the potential for production growth appears to significantly outpace the potential for demand increases.”

Rising service costs and the need for the market ultimately to price at levels that approach the cost of marginal wells means that prices will have to rise to $6-7/MMBtu by 2015, the Barclays team has concluded.

“While we do not dismiss the possibility that they could correct to that level, the evidence that producers can rapidly ramp supply higher in response to prices well below $7 suggests that such prices are unlikely to be sustained.”

Considering the drilling efficiencies in the past two years and the production-growth producer business model, the market is faced with “two daunting obstacles for a sustained pullback in U.S. supply. While producers may require $6 or higher prices for supply to remain near current levels, a willingness to drill in a lower price environment suggests that prices can remain detached from costs for an extended period.”

With several unknowns still to be determined, the Barclays team set its 2012 price outlook to $5.25/MMBtu and the long-term (2015) gas price to $5.75.

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