Price outlooks slashed amid natural gas glut

Natural gas prices are headed lower on rising production in the United States and slow-to-recover demand across North America, prompting analysts to reduce their 2010 forecasts.

Expect Canadian spot natural gas prices to take a bigger hit than their U.S. counterparts, AJM Petroleum Consultants said Tuesday.

Economist and AJM vicepresident Ralph Glass slashed a dollar off his previous estimate for the average benchmark AECO hub price in 2010, to $4.80 per thousand cubic feet.

He also lowered the forecast for natural gas futures in New York to $5 US per mcf, down 75 cents, and noted prices have been eroding since February at the same time storage levels have risen.

"It's telling us that there's still an oversupply of natural gas in the market, particularly in the U.S.," Glass said. "I just don't see the recovery, even if it's industrial or economic in the States, having that dramatic effect yet on the gas price with such high storage levels."

The same sentiment was echoed in New York as natural gas futures dropped 18.1 cents to close Tuesday at $4.096 US per million British thermal units.

The fall was led by concerns about high storage levels that were exacerbated after a U.S. federal agency raised its 2010 production forecast.

A cold beginning of the year failed to substantially draw down inventories in time for an onslaught of unseasonably warm weather in March.

In Canada, inventories exited the month almost 30 per cent higher than a year ago, at about 422.5 billion cubic feet, driven by weak exports and general soft demand because of the recession.

Despite an increase in Canadian natural gas production during the first quarter, total supplies were five per cent lower than March 2009, according to analyst Martin King, with FirstEnergy Capital Corp.

"We expect that supplies will seasonally top out within the next two weeks and then begin a steady erosion after that," King said Tuesday in a commentary. "With the strong likelihood that there will be little gas drilling this spring and summer, owing to very weak pricing, there appears to be little to rescue gas supply from another plunge this year."

Across the border, mild spring weather saw reduced withdrawals from storage, then early injections, leading to inventories surpassing historic levels.

Last week, U.S. storage rose to 1.64 trillion cubic feet, almost 11 per cent higher than the five-year average.

An increase in working natural gas rigs prompted the agency to boost its production forecast by almost four per cent forecast to 60.87 billion cubic feet per day. The EIA predicted a 0.7 per cent growth over the year, from February's estimate of a decrease of one per cent.

The increased U.S. production is expected to exceed demand, prompting the agency to chop its price estimate Tuesday by 14 per cent.

The EIA predicts benchmark Henry Hub spot prices will average $4.44 US per million British thermal units in 2010, down substantially from $5.17 US per mmBTU forecast a month ago.

"With no further increase from the current 950 natural gas rigs currently working, EIA expects production to begin to show month-to-month declines beginning in the second quarter this year," the agency stated. "However, production is not expected to begin to show year-over-year declines until the first quarter of 2011."

Drilling activity in Western Canada started sliding in February to an early close with spring breakup and heavy equipment bans on roads being enforced in early March.

As of Monday, 20 per cent of drilling rigs in the region were working, down from a peak of 65 per cent during the first week of February.

Last year, when prices had tumbled and royalty rates in Alberta were increased, 11 per cent of the fleet was active.

However, the number of available rigs dropped by 10 per cent over the same period as companies cleared out older units and culled an oversupplied market.

domeara@theherald. canwest.com