SOUNDS LIKE MORE BAD NEWS FOR NEAR TERM FUTURE GAS EXPLORATION AND PRODUCTION, HOPE NOT!

Market Insight: Winter spike won't prevent natural gas price collapse in 2009
PennEnergy


Even a sharp spike in US natural gas prices owing to colder-than-normal weather heading into yearend won't prevent a gas price collapse in 2009.
The supply fundamentals simply won't allow that to happen, according to Raymond James & Associates Inc. Put simply, there's just too much gas out there.

The summer gas storage season ended at about 3.5 tcf even with the continued shutin of nearly 300 bcf of gas caused by hurricane damage. To balance the US natural gas market in 2009 and 2010, the industry will have to cut back gas drilling activity and even shut in more wells.

Depending upon how cold it gets this winter, US gas producers will have to shut in anywhere from 500 to 750 bcf of gas to balance the market next year, according to RJA. That would be the case if gas prices slip below the analyst's 2009 price forecast of $6.75/Mcf.

Apart from excess supply, RJA is also concerned about stagnation in gas demand resulting from the economic slump. Its model shows the market drawing 600 bcf less from storage this winter than last winter.

RJA also insists that its outlook is fairly conservative, as gas production was on track to grow by 9% year-on-year before the hurricanes hit the Gulf of Mexico region in the hitrd quarter. Because production lags rig activity by several months, expect year-on-year gas supply increases to continue through 1Q 2009.

In other words, the analyst thinks its own model might be a tad bullish: If gas supply growth continues on its current trend and winter weather hews more to the 10-year (warmer) average for temperatures than to the 30-year average, then that $6.75/Mcf forecast might look pretty good to producers.
Contact Bob Williams at bobw@pennwell.com