July 21, 2009 / 3:35 PM / 10 years ago

Analysts again scale back U.S. natgas price outlook

NEW YORK (Reuters) - Record-high inventories and prospects for a slow economic recovery again forced energy analysts to scale back their forecasts for U.S. natural gas prices this year and next year despite a steep slide in drilling that should eventually tighten supplies.

The Reuters quarterly poll showed 27 industry experts expect spot prices this year at Henry Hub, the benchmark U.S. supply point in Louisiana, to average $4.21 per mmBtu, 10 percent below last quarter’s estimates and more than 50 percent below 2008’s record high average of $8.93 per mmBtu.

“We have a rather deep economic recession, and the industrial sector has taken quite a hit. There’s no way productive capacity can turn around that quickly to rebalance the market,” said Kevin Petak, vice president at consultants ICF International in Virginia.

He said economic recovery, expected later this year or next year, was the key to improving the supply-demand balance.

For the first six months of the year, Henry Hub cash prices have averaged $4.18 per mmBtu, a whopping 57 percent below last year’s record high first half average of $9.78.

Despite a cold winter, near record-high first-quarter production and a deep recession that sharply cut industrial demand left inventories at the end of the heating season at their second highest level ever.

With profitable cash spreads to winter futures offering a strong incentive to rebuild storage early, the stock building season got off to a strong start.

Utilities typically build up inventories from April through October to help meet peak winter heating needs. High storage gives utilities more bargaining power when buying supplies during the so called injection season.

The healthy pace of storage refills this year has driven total stockpiles to nearly 2.9 trillion cubic feet, a record high for this time, and some analysts still worry prices could collapse later this summer or in early autumn as caverns fill up and back more supply into an already-oversupplied market.

Even if injections just match the five-year average for the next 16 weeks, stocks will hit an all-time high of 3.83 tcf by winter, 7 percent above the previous record in October 2007 and a level some consider to be very near total capacity.

LNG IMPORTS, A WILD CARD

Another factor that could hinder a price recovery this year would be imports of LNG — natural gas that is super-cooled into liquid form for shipping.

While estimates for a doubling or tripling of LNG imports this summer have not yet materialized, concerns still exist that a flood could come later, as European storage fills up early and backs more liquefied gas into the global market.

So far this year, LNG imports to the United States have been running at about 1.4 billion cubic feet per day, up from last year’s average of about 1 bcf daily but below forecasts this spring of between 2 bcf and 3 bcf per day.

Despite declining pipeline imports from Canada, which help meet about 15 percent of total U.S. needs, the increase in LNG supplies, while still modest, has only added to the surplus.

“We’ve got new pipelines, more shale gas and more LNG. There’s an overhang in supply that you have to eat through, and that could take a couple of years,” said Tina Vital, an analyst at S&P in New York.

PRODUCTION DECLINES STIR HOPE FOR BULLS

But despite the near-term oversupply, some analysts expect the steep decline in drilling and slowing domestic production to eventually tighten the market.

“Drilling activity is down dramatically, and we’ve got a downtrend in production which looks like it’s going to continue. The fundamentals are tipping from a clear bearish phase to recent storage data which suggests it’s neutral,” said energy analyst Tim Evans at Citi Futures Perspective.

Since peaking at just over 1,600 in September, the U.S. gas drilling rig count is down nearly 60 percent to its lowest level in more than seven years, according to oil services firm Baker Hughes in Houston.

Recent U.S. Energy Information Administration data showed U.S. natural gas production fell for a fourth straight month in June, with output finally dropping below the same year-ago month for the first time this year.

While many analysts still expect the economy to be slow to recover this year, most do expect some improvement in 2010 at a time when domestic production should be falling sharply.

EIA expects U.S. gas consumption to hold steady next year after dropping 2 percent this year, but a projected decline in 2010 of 3 percent in domestic production should mean a tighter supply-demand balance.

The Reuters poll showed analysts expect Henry Hub prices to jump more than 40 percent next year to $6.03 although last quarter their estimates were 5 percent higher at $6.34.

As the economic recovery gains speed, prices in 2011 were seen averaging $7.01 per mmBtu, up another 16 percent.

Editing by John Picinich

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