Simmons & Co.: Reduced drilling could help gas market by yearend

By OGJ editors

While the 2012 US natural gas market will continue to be oversupplied despite increased demand, future production levels will be largely a function of this year’s capital discipline, according to an outlook from analysts at investment bank Simmons & Co. International.

Simmons & Co. forecasts that gas supply will exceed demand by 1.2 bcfd this year, leading to full storage in October and curtailments being required to balance the market. Working gas storage capacity in the US is estimated to be 4,150 bcf. At yearend 2011, gas in storage was 3,472 bcf.

This year’s gas demand growth is forecast to be 1.7 bcfd, driven primarily by increased industrial demand, up 0.7 bcfd from last year, and by demand for gas in power generation, up by 0.5 bcfd from last year.

With prompt-month futures prices recently dipping below $3/Mcf, Simmons & Co. said gas prices are now at a level that, without hedges and drilling carries from joint ventures, it is not economic to drill for gas except in the lowest-cost areas like the Marcellus shale, and these areas are the exception as opposed to the rule of US gas basins.

If producers respond to lower prices by meaningfully reducing drilling activity, the gas market could improve by yearend and result in a better outlook for 2013, the research said. The analysts’ forecast includes a 13% decrease in the gas rig count in the fourth quarter of 2012 from fourth-quarter 2011.

“Should gas prices start to rebound, there is a pretty firm ceiling at $5/Mcf. At that price, we expect producers would ramp drilling programs and be very aggressive hedgers,” the outlook said.

Given the likely need for curtailments, Simmons & Co. expects 2012 spot Henry Hub gas prices at some point this year to decline to below $2/Mcf.

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