Natural Gas Price Forecast - bearish

[dan_s]

IMO natural gas prices will drift lower this summer and bottom in the 3rd quarter. $3.50/mcf is my guess.

Here are comments from Raymond James' "Energy Stat of the Week" (4/4/2011):

While it is clear that the natural gas rig count peaked (back in August) and is heading slowly lower, the discussion has now shifted toward gauging the impact to underlying U.S. supply. In our view, natural gas production will be up over 4 Bcf/day (or about 7%) in 2011 despite a 10% reduction in gas drilling activity. Does this sound vaguely familiar to the stance we took back in 2008 when the "industry pundits" were calling for a sharp and massive roll over in production? Do we all remember how that one played out? After the rig count peaked in August 2008, it fell a whopping 60% before gas supply finally turned south as high-grading ran its course. Despite this massive reduction in drilling activity, gas supply fell only 2 Bcf/day (or 3%) peak-to-trough. This time, we are looking at a much more modest and gradual 10% reduction in drilling activity. We once again believe the market is overestimating the impact of these modestly lower activity levels (or rather underestimating the resiliency of supply growth). All-in, we see U.S. gas supply growth of 4-5 Bcf/day in 2011, which will likely weigh on U.S. natural gas pricing as we enter the summer.

[dan_s]

Drillers are just simply too good at getting gas out of the ground. Increased efficiencies have cut both drilling times and costs. In other words, the increased productivity of rigs on a per-well basis requires fewer overall rigs to drill the same amount of wells. Also, operators are still moving up the learning curve in the newer shale plays. How often do you hear operators talk about the increasing numbers of days to drill a well? Never. Anecdotal data suggests that most shale plays experience a 25% to 80% reduction in drilling times during the first few years of the play’s development. This is particularly evident after examining the reduction in drilling days from the earlier shale/tight sand gas plays (pre-Haynesville) as shown in the table below. Even more impressive (although not reflected in this chart) is the fact that drilling days over the 2006-2010 period for these plays declined despite increasingly longer lateral lengths. These efficiencies have translated quickly to the newer gassy plays (Haynesville, Marcellus, Eagle Ford, Cana Woodford), and we only expect producers to move faster up the learning curve. How do we know this? Because the Haynesville Shale just recently passed the Barnett Shale as the top gasproducing shale play in the United States, now producing 5.5 Bcf/d after just two years of large-scale production. It took Barnett production nearly a decade to top the 5 Bcf/d mark. So...next up on deck...Marcellus Shale?