The big, sustained rally in 2010 U.S. natural gas prices predicted by some on Wall Street likely will fizzle as soon as the uncompleted wells and shut-in supply flood back into the market, energy analysts said last week.

Prognosticating about domestic gas prices, it’s “still thorny,” analysts with Raymond James & Associates Inc. said in a note to clients.

“Many have mistakenly attributed the recent tightness to a supply rollover instead of pipeline constraints,” wrote J. Marshall Adkins, Christopher Butschek and William Eagan. Some of the “gassy stocks are already pricing in a 2010 gas price improvement to well above $6/Mcf.”

However, by Raymond James’ calculations, “gas storage will be at or near full this time next year. As a result, we’ve lowered our 2010 natural gas price forecast to $5.50/Mcf, which is now about 10% below current market expectations.” The team previously had forecast 2010 gas prices to average around $6/Mcf.

Late last year Adkins and his colleagues forecast that 2009 gas prices would average $5/Mcf, which at the time was 20% below the futures strip and 30% below consensus. “Through the first three quarters, even our bearish outlook has proven to be overly optimistic as gas prices have averaged 17% below our bearish estimates,” they noted.

“On the U.S. natural gas front, the situation is much cloudier than global oil,” said the trio. “So far, the gas market’s willingness to overlook near-term weakness for an expected price recovery in 2010 helped keep near-term gas prices from remaining low,” with 3Q2009 prices averaging $3.40/Mcf.

“We aren’t ready to ‘bull up’ on 2010 natural gas,” said the Raymond James team. “Over the past month, the supply/demand balance for natural gas has tightened considerably. On the face of it, this seems bullish for 2010 and many have pointed to this recent tightness as proof that U.S. supply has started a dramatic and severe rollover. We are not so sure.”

For the Raymond James team, figuring out where gas prices will go rests on some key variables: How quickly and to what extent will domestic production drop? How much supply has been delayed or idled until gas prices rebound? How much new liquefied natural gas will enter the market over the coming year, and where is it headed? Will an economic recovery be sufficient to offset switching back to coal if gas prices jump?

FBR Capital’s Rehan Rashid also sees only a “modest recovery” for U.S. gas prices for 2010. He said gas prices bottomed in 3Q2009, and going into the final three months of 2009, prices should average around $3.75/Mcf. FBR is forecasting 2010 gas prices to be around $4.50/Mcf, which would be just enough, said Rashid.

“A $6/Mcf natural gas price is not needed to drive the desired outperformance” for gas explorers, Rashid wrote.

The early cold weather already has begun to boost prices, said analysts with Stephen Smith Energy Associates. November Henry Hub futures closed on Oct. 9 at $4.77/MMBtu, up from $4.72 for the week ending Oct. 2.

“In sharp contrast, cash Henry Hub, now under considerably less ‘storage crunch pressure’ with a much colder-than-normal second half of October expected for Oklahoma and east, increased from $2.32/MMBtu to $3.92/MMBtu over the same period of time,” the Smith analysts noted.

Average weekly Henry Hub cash prices appeared to have bottomed at $2.19/MMBtu for the week ending Sept. 4, said the Smith analysts. “Gas prices have trended up in two separate price surges in the five weeks since then. The first of these two price surges coincided with two-three weeks of rising line pressures…”

For January 2010, the Smith analysts are forecasting Henry Hub bidweek prices to be $5-6.00/MMBtu. By comparison, the January 2010 Henry Hub contract closed at $5.91/MMBtu on Oct. 9, compared with $5.82 on Oct. 2.

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