Research analysts with Calgary-based Tristone Capital Inc. are optimistic on the outlook for natural gas beginning in the second half of 2009 and foresee a possible US gas supply shortage in 2010.
In a recent report, Tristone Capital sees gas supply hitting a critical inflection point in July, when sequential monthly declines take hold and accelerate into the fall of this year. The analysts expect US gas supply to fall more than 500 MMcfd each month between now and the start of next year, with supply down 5.5 bcfd by early 2010.
The drop in horizontal drilling rig count, while appearing later than expected, is here and deeper than anticipated, Tristone Capital said. As such, the drop in the rig count will not do much to stave off shut-ins this fall, but the drop in supply will begin to accelerate into this year’s third quarter, with production down nearly 4 bcfd year-on-year by the start of winter.
The Tristone Capital forecast also incorporates some optimism in demand, calling for gas to gain market share on coal in the power generation market and foreseeing limited upside in volumes of US LNG imports.
“The decline in supply coupled with a modest recovery in demand should result in the market swinging to tighter than normal, and with it, inventory destocking throughout 2010. Our current model suggests the call on LNG increases to 3.1 bcfd in 2010, although in reality, the price signal required to bring LNG to the US to balance the market should trigger a recovery in shale supply in the spring,” the report says.
Tristone Capital forecasts that gas on the New York Mercantile Exchange will average $6.75/MMbtu for 2010 and believes the drop in US gas output will create a call for up to an incremental 2 bcfd in LNG imports in 2010, “which has very strong pricing implications for gas prices in the coming months.”
“While near-term risks of excess supply may put pressure on front-month pricing, we see a shift in market sentiment in the coming weeks, as the market latches on to the magnitude of production declines and with it, equity investors look through the storage reset and start discounting a rising futures curve,” the report says.
Tristone Capital also explains the lag in production declines. Despite the rapid decline in the gas rig count to 711 recently from a peak of 1,606 in September 2008, the low-cost, high-deliverability shale plays, including Haynesville, Marcellus, and Fayetteville, continue to add rigs, thereby changing the productive intensity of a rig in North America.
Estimating the annualized production intensity per rig in the US has increased to 12.5 MMcfd from 9.7 MMcfd at the beginning of 2007, with a notable step change in output per rig when Haynesville activity accelerated in July 2008, Tristone Capital puts the overall efficiency gain from the dominant shale plays at nearly 30%. The drop in the rig count is not directly correlated with supply, given the rising contribution from these active shale plays, Tristone Capital said.
