The normally bullish energy team with Raymond James & Associates Inc. Monday said U.S. natural gas prices may rally toward the end of this year, but plentiful supplies and an overabundance of storage could lead to a “disaster” in 2008.
The analysts, led by J. Marshall Adkins, revised their near-term gas price outlook upward in 4Q2007 to $7.50/Mcf from $6.50 but significantly cut the full-year 2008 forecast to $7.00/Mcf from $10.
In July, Raymond James twice reduced its short-term gas price forecast and downgraded several “gassy” energy stocks on the “reasonable chance” that U.S. gas prices could fall to $5/Mcf or lower because of bloated storage levels (see Daily GPI, July 31).
In a bit of optimism, Adkins raised his estimate of the 4Q2007 New York Mercantile Exchange price based on an “early winter natural gas rally supported by easy year-over-year weather comparisons.” However, he warned that the second half of winter and the remainder of 2008 will trend to the bears as increasing U.S. gas supplies coupled with a surge in liquefied natural gas (LNG) imports drive prices lower through next summer.
According to Adkins, normal winter weather would lead to a storage withdrawal of nearly 30%, or 200 Bcf, more gas than last year through the first 82 days of this winter. However, in the final 10 weeks of winter, he expects to see a withdrawal of up to 30%, or more than 300 Bcf, less gas than a year ago.
“If our projections are correct, total gas withdrawals will be 7% less than last winter, and the market will be left with a bloated 1.7 Tcf of winter-ending storage,” Adkins wrote. The high storage levels “will likely provide downward pressure on natural gas prices through the spring of 2008. Compounding the problem, increased summer 2008 U.S. domestic supply and a hefty increase in LNG imports should further saturate the market through the summer.”
After a late rally in 2007, U.S. gas prices “could be a disaster in 2008,” Adkins said. “As if beginning the summer with a record storage level was not bad enough, plentiful supplies will likely force much higher-than-normal gas inventory builds through the summer of 2008. Most supply and demand factors…do not change much from the winter assumptions except for a large increase in LNG imports.”
The analyst noted that the United States’ current LNG regasification capacity is nearly 6 Bcf/d. “By early summer 2008, that capacity should increase by 4-5 Bcf/d to a whopping 10-11 Bcf/d total. On the other side of the equation, global liquefaction capacity should increase by 4-5 Bcf/d (or about 15%). Remember that the United States, due to its ample storage facilities, will remain the ‘market of last resort’ during the summer.”
Adkins said “it now seems likely that year-over-year LNG imports into the U.S. will increase by about 2 Bcf/d next summer. The increase in LNG imports, combined with higher core U.S. supply levels and incremental production from the Independence Hub [in the Gulf of Mexico], will likely drive gas storage injections to about 2 Bcf/d higher than last summer.
“Many gas-weighted names will track closely with the price of natural gas and likely bottom in September/October before rallying to end the year. This represents a natural gas play for investors in the near term, but we advise caution since in the long term we are forecasting 2008 to be much more bearish than our previous estimates.”
Assuming a normal weather patter, the “gassy” stocks should bottom in the coming weeks, then rally through mid-January, said Adkins. The biggest beneficiaries should be U.S. land drillers and service companies with significant North American operations. The outlook also should assist gas-weighted independents.
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