There was not a bit of cheer to be found in Raymond James & Associates’ outlook Monday for U.S. natural gas markets, with analysts cutting 2009 price forecasts to $5/Mcf from $6.75. U.S. producers may have to shut in around half, or 800 Bcf, of output in the coming year to balance the markets, said analysts.

The domestic gas market has 6 Bcf/d — or 10% — more gas in the system than at the same time last year, and “that is a recipe for disaster,” said analysts J. Marshall Adkins and Christopher Butschek in the firm’s “Stat of the Week.”

“The combination of strong supply growth and rapidly declining demand has caused an ugly natural gas outlook to turn much worse,” wrote the duo. “Economic concerns in the U.S. are now weighing heavily on industrial and power generation demand, while the worldwide recession has depressed all commodity prices, effectively eliminating any fuel-switching incentives. Altogether, these changes have dramatically darkened our near-term outlook on natural gas…”

The analysts’ expectations for a near-50% reduction in the rig count “will likely be too little, too late for 2009 gas prices,” but it may be enough to balance the market by 2010. “Accordingly, we have initialized a 2010 forecast of $8/Mcf.”

In early September Raymond James analysts predicted that 2009 gas prices would average around $6.75/Mcf, which at the time was about $3 below consensus estimates (see Daily GPI, Sept. 9). Since then gas fundamentals have only gotten worse, said the duo.

“Now we have a demand problem,” said Adkins and Butschek. “Earlier this year, we thought an unusually cold winter could possibly save 2009 natural gas prices. Now we are going to see significant natural gas production shut-ins and regional price collapses regardless of winter weather.”

Consensus estimates by energy analysts are around $7.50/Mcf but “they are still way too high,” said the analysts. Given the deteriorating economy, gas prices likely will be closer to $5, and “we expect to see certain regional gas prices (Rockies and Midcontinent) fall well below $2/Mcf next year to force producers to shut in production. Can you say U-G-L-Y?”

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