Natural gas bull slashes outlook

OTTAWA — FirstEnergy Capital has slashed its outlook for natural gas through 2012, saying prices won’t rise until the market slays the “supply dragon” that holds it in its sway.

The Calgary-based investment dealer, which until now had been bullish on a natural-gas price recovery, cut its outlook on the benchmark Nymex Henry Hub price on Monday to an average for 2010 of US$4.63 per million British thermal units, 40 cents US lower than forecast.

For 2011, FirstEnergy commodity analyst Martin King is forecasting an average price of US$4.75 per mmbtu, a full dollar lower than previously projected, and for 2012, the price has been cut by US$1.25 to US$5.

“With this interim price forecast update we are effectively abandoning hope that any price recovery on the scale that we had been previously forecasting for late 2010 and 2011 will come to pass,” Mr. King wrote in a research note.

“Instead, we are now wielding a price sword to slay this supply dragon with the view that prices low enough for long enough will tilt the balance of the market firmly to a structurally undersupplied situation.”

Prices have fallen almost 25% in the past three and a half weeks to a new 52-week low on Friday of $3.70 per mmbtu. A slight decline in U.S. storage levels coming into October was not enough to overcome bearish sentiment colouring the market, Mr. King said.

“As such,” he said, “placing money in North American natural gas investments is likely dead money.”

Accordingly, FirstEnergy has cut its target prices on several key Canadian energy players.

The 12-month target for Encana has been cut by $4 a share to US$33, while Talisman has been cut by $1.00 to $21.00, Canadian Natural Resources to $44 a share from $47, Nexen to $24 from $26, Husky Energy to $27 from $29, Suncor to $38 from $40. Cenovus and Imperial Oil targets remained unchanged at $34 and $44 respectively.

Mr. King said the energy firm finally buckled in its price outlook after one of the hottest summers on record — and power generation to meet air conditioning demand — failed to significantly dent supply growth or to reduce drill rig activity.

Meanwhile, new pipelines in the U.S. and Canada will begin to deliver additional supply from resource plays made economical by horizontal drilling technology at the same time that liquefied natural gas delivered to Eastern Canada and the U.S. Northeast have “created another wall of competition for long-haul gas volumes from Western Canada.”

Demand has recovered from recession levels but failed to do more, and is now faced with a levelling out of gas demand if not an actual retrenchment as slowing economic activity may reduce industrial demand.