Wells Fargo slashes gas-price forecast 11% this year, 15% for 2012

Washington (Platts)--5Oct2011/320 pm EDT/1920 GMT

With natural gas supplies still rising despite the move towards liquids and slowing demand in a cooling economy, an energy analyst for Wells Fargo slashed by double digits his gas price forecast Wednesday.

"Wish we could start off this section pointing out how the market is wrong and how the outlook for natural gas has turned. But we can't," said Wells Fargo energy analyst David Tameron. "Plain and simple, it's just not very encouraging."

Tameron slashed his 2011 price forecast 11% to $4.15/MMBtu and his 2012 forecast 15% to $4.54/MMBtu. Wells Fargo sees some tightening in 2013, but still cut the forecast for that year 10% to $5.15/MMBtu.

"Longer term, we still believe in natural gas and the power of the blue flame," Tameron said. "Power generation demand is still in the early innings of a secular uptrend," Tameron added, saying that gas is cleaner and, often, cheaper than coal.

Despite these signs, Tameron cut 8% from his long-term gas-price forecast to $5.50/MMBtu.

Tameron had thought that gas production would decrease towards the end of this year as joint-venture arrangements ended and the need to drill leases to hold them by production slowed. But the joint ventures kept coming and producers kept drilling leases to hold by production, increasing North America's gas supply, Tameron said.

"In addition, natural gas liquids prices are up dramatically versus a year ago, with the third quarter of 2011 up 39% from the third quarter [of] 2010."

"Many of these plays that operators are saying are "liquids-rich" are really just natural gas plays with an NGL component," Tameron explained. "Not saying the economics don't work, just saying that NGL prices rather than natural gas prices are likely the determining factors."

In his supply model, Tameron sees US gas output rising 6% this year to 62.4 Bcf/d, before slowing to 1.3% growth next year, with Canadian imports declining to around 6 Bcf/d with LNG imports staying flat this year, holding at less than 1 Bcf/d.

While industrial demand should rise 2.3% to 18.5 Bcf/d this year, demand from the residential, commercial and power sectors all are expected to be flat, Tameron said.

"We think the supply-driven natural gas market will continue to be challenged over the next 12 months," Tameron said. "Our current supply/demand forecast shows another oversupplied market in 2012. We are currently forecasting full-year supply to exceed demand by 1.8 Bcf/d [in 2012], although we note this imbalance is front-end loaded."

--Bill Holland, bill_holland@platts.com

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