Energy analysts at Raymond James & Associates Inc. cut their natural gas price forecast through the rest of the year on the “reasonable chance” that U.S. gas prices could fall to $5/Mcf or lower over the next two months because of bloated storage levels.

Raymond James’ J. Marshall Adkins and his team lowered their 2007 gas price forecast for the second time in less than a month (see NGI, July 9). They now forecast third quarter gas prices to fall to $6/Mcf from $6.50 (Henry Hub), with fourth quarter prices down to $6.50 from $7.50. Third quarter crude oil prices were increased to $73/bbl from $67.

Summer-ending gas storage estimates “now suggest the U.S. is trending north of 3,500 Bcf by the end of October. At this pace, gas storage would eclipse the all-time high of around 3,450 Bcf set last summer…We believe that the primary risk over the next couple of months is that U.S. gas prices will have to fall enough to discourage LNG [liquefied natural gas] imports and encourage gas well shut-ins,” the analysts said.

The normally bullish Raymond James team said it had expected declining U.S. and Canadian gas supplies to “drive a tighter summer gas market and force year-over-year gas storage levels lower. In fact, we initially thought that this summer would end with a lower than normal ending gas storage of around 3,100 Bcf…well below last summer’s all-time high of 3,461 Bcf of ending gas storage.”

However, by late June, “we realized that our initial assumptions were simply wrong.” With another month of data to review, “we now believe that the gas markets could be headed for a late summer meltdown similar to what we saw last year.” Last summer, front-month gas plunged from nearly $8/Mcf in early August to the low of $4/Mcf at the end of September.

“Our summer-ending estimates now show that storage levels are trending toward a bearish 3,500 Bcf,” Adkins wrote. “Compounding the problem is the fact that year-over-year gas storage comparisons over the coming weeks are extremely difficult due to last August’s record-setting summer temperatures. What this means is that there is a high likelihood that we see a replay of last year’s gas price collapse in the August/September time frame.”

According to the analysts, the year-over-year U.S. gas supply/demand equation “has run roughly 1.5 Bcf/d looser (i.e., more gas in the system) for the first four months of summer. As a result, we currently have nearly 180 Bcf more gas in storage than we would have thought four months ago.

“Although imports from Canada have declined and liquids stripping volumes have increased over the summer, these trends have not been enough to offset the very bearish impacts from surprising upticks in U.S. supply, LNG imports, and to a smaller extent, lower exports to Mexico. Our initial estimate for summer-ending storage (3,100 Bcf) looks like a far-flung possibility.”

Based on Energy Information Administration data and gas storage injections, “we now believe that stronger than expected productivity from the rapidly growing onshore resource plays (i.e., Barnett Shale, etc.) has temporarily overcome the declining initial well productivity of core U.S. supply.”

However, based on recent pipeline throughput data and longer-term declining initial productivity per-well trends over the past decade, the analysts expect the gas supply growth to moderate.

“The net result, which we believe will become evident in 2008, is that a minor increase in drilling activity will be unable to replace the overall decline in U.S. gas production. In the short term, however, the trend shows that U.S. supply is likely the biggest factor behind the supply glut this summer.”

Since April, LNG imports have averaged about 1.1 Bcf/d higher on a year-over-year basis, which is above Raymond James’ initial expectations for average April-June year-over-year LNG import volumes of 0.8 Bcf/d. However, the analysts said lower U.S. gas prices should discourage an excess of LNG shipments going forward.

Also, given the sharp decline in Canadian drilling activity and continued increase in gas demand from the oilsands sector, the Raymond James analysts also expect Canadian gas exports to continue to decline to about 1 Bcf/d lower than last year.

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