Hurricanes Gustav and Ike likely prevented voluntary natural gas production shut-ins as summer wound down, but oversupply concerns should keep gas prices depressed through 2009, and a soft floor of around $7/Mcf “could easily be breached” if the rig count isn’t severely cut, Raymond James & Associates Inc. energy analysts predicted.

Even if the gas rig count drops, “we still look for production shut-ins near the end of next summer, hence our $6/Mcf 3Q2009 forecast,” wrote analysts J. Marshall Adkins, Kristal Choy and Christopher Butschek in their October monthly report. “Our 2009 forecast of $6.75/Mcf remains 20% below futures pricing and nearly 30% below the Street, suggesting that natural gas’ precipitous decline may not be over quite yet.”

The Raymond James energy team called a “mayday” on U.S. gas prices in September, slashing its domestic price forecast for 4Q2008 to $7.50/Mcf from $10, which at the time was 40 cents lower than the futures price and nearly $4 below Wall Street’s consensus (see Daily GPI, Sept. 9). Adkins and company noted that gas prices now have fallen 50% from summer peaks.

“While post-hurricane offshore production shut-ins (nearly 3 Bcf/d) remain a concern, surging onshore supply and questionable demand growth continue to weigh on prices,” said the Raymond James analysts. “Even after over 200 Bcf of production shut-ins from Hurricanes Gustav and Ike, storage may still end the summer injection season near last year’s record level. This would leave the U.S. awash in gas this winter, potentially calling for a substantial cut in the rig count and production shut-ins to bring the market back into balance. As a result, we also lowered our 2009 forecast from $7.50/Mcf to $6.75/Mcf.”

The market, said the analysts, is finally beginning to realize the magnitude of U.S. gas production growth, which they estimated was up 7% in the first half of 2008.

“Over the past few weeks (before the two hurricanes), this supply growth was the primary driver behind our string of massive storage injections, over 4 Bcf/d more than last year after adjusting for weather,” said the analysts. “Second, extraordinary easy weather comps for this upcoming winter will make it difficult for cold weather to bail us out this time, as it was already cold last year.”

Assuming normal winter weather, Raymond James is forecasting winter-ending storage in excess of 1.8 Tcf, nearly 600 Bcf higher than the year before. “Should gas storage exit winter at levels anywhere near this, the market will be in for a serious correction,” said the analysts.

Coal-to-gas fuel switching also remains limited, they said. “Previously, it had been suggested that coal provides a floor to natural gas, with power plants switching between the two at a level in the $7/Mcf range. Since then, we’ve learned that coal-to-gas switching faces a series of difficult hurdles, and, even if it clears all of these hurdles, is limited to 2 Bcf/d due to shipping constraints.”

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