Analysts again trim U.S. nat gas price estimates: Reuters poll

NEW YORK (Reuters) - Near record high U.S. natural gas production and comfortable inventories prompted energy analysts to trim price estimates for 2011 despite strong heating demand early this winter.

The Reuters quarterly poll put the consensus forecast for spot prices this year at Henry Hub, the benchmark U.S. supply point in Louisiana, at an average $4.43 per mmBtu, down 6 percent from last quarter's estimate but little changed from the $4.41 average in 2010.

Last year, natural gas was the worst performer in the Reuters-Jefferies CRB index of 19 commodities, sinking 21 percent. Currently, Henry Hub gas is trading around $4.30.

It was the eighth straight quarterly decline in 2011 price estimates since first being polled at $7.60 in January 2009, as steady growth in shale output continued to keep gas production hovering near 40-year highs.

"The biggest driver to our price estimate continues to be the pace of production growth. We're still seeing robust growth, far stronger than demand can absorb without the help of coal displacement," said Biliana Pehlivanova, analyst at Barclays Capital in New York.

Of the 29 industry participants, 17 revised their January forecasts downward, while six were unchanged and four were revised upward. Two had not participated in the previous poll.

"We expect natural gas pricing to be under pressure throughout 2011, with little move away from current pricing until the supply and demand better balance," David Wood, chief executive officer of Murphy Oil told analysts on Thursday.

While analysts see prices 15 percent higher at $5.11 in 2012, current estimates were 4 percent lower than in the previous quarterly poll amid expectations output will remain stubbornly high through much of 2011 and demand will stay flat or fall slightly, keeping the supply-demand balance loose.

Prices in 2013 were seen gaining 8 percent to $5.52 as producers gradually shift away from gas to higher margins in oil, while an improved economy lifts industrial and electric power demand.

SUPPLY STRONG

Strong production has been a major roadblock to balancing supply and demand, but recent drilling rig declines have raised expectations output might slow in the second half of 2011.

The Baker Hughes gas rig count has fallen in six of the last eight weeks and is down 8 percent from its August high, but the count of 913 is still well above the 800 some analysts say is needed to finally trim output.

The U.S. Energy Information Administration expects U.S. marketed gas production this year to be down only 0.3 percent from last year's near record high output, which could keep prices on the defensive again this year.

Most analysts don't expect any major slowdown in domestic gas output until the second half of the year at the earliest.

"Even if the rig count drops, there are a lot of wells that are not completed yet, so it will take a long time for production to drop," said Ron Denhardt at Strategic Energy.

While cold temperatures this winter have shaved an extra 100 billion cubic feet or more from inventory so far, storage is still comfortable and should end the season near the 2006 record of 1.695 trillion cubic feet, a comfortable level to start rebuilding stocks for next heating season.

Utilities typically build inventories from April through October to help meet 25 percent of peak winter heating needs.

High stockpiles at the start of the injection season give utilities more discretion when buying next winter's supplies.

Imports are not expected to add much additional gas to supply in 2011, with EIA expecting both LNG and Canadian pipeline supplies to fall slightly this year.

DEMAND NOT LIKELY TO PICK UP ENOUGH

Despite strong weather demand, physical gas prices have been unable to break above $5 this winter, capped by concerns about high supplies.

A recovering economy could boost industrial gas demand in 2011 and help tighten the supply-demand balance, but overall consumption is not expected to gain much, if at all, this year, keeping the balance loose.

EIA sees total gas demand down nearly 1 percent this year amid expectations heating and cooling loads in 2011 will fall short of last year's extreme levels despite an estimated 1.1 percent gain in industrial use, which makes up nearly 30 percent of the total.

"We're going to see the full year impact of economic recovery in the industrial sector, but a normal summer will cut demand in the power sector by several bcf per day. Demand could be up a bit but not a lot because of the big (summer) offset," said Steve Thumb, principal at Energy Ventures Analysis.

Many analysts think the only way to balance the gas market this year will be if prices to remain low enough to displace more coal-fired generation.

Analysts estimate coal displacement last year added some 1.5 bcf, or 2 percent, to average daily gas demand of about 65 bcf yet it has not done much to rally prices.

In 2009, switching from coal added about 3 bcf per day to gas demand, with peaks at times climbing to 5 bcfd.

Additional economic gains should make 2012 a more balanced year, as further growth in industrial and power generation demand help soak up some of the excess supply.

(Additional reporting by Anna Driver in Houston; Editing by John Picinich)