Natural Gas Price Fall May Be Limited, ’Bullish’ Bernstein Says

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by Ben Farey

Feb. 9 (Bloomberg) — Natural gas prices may be supported by delays to new natural gas supplies and a possible slowdown in U.S. onshore output, Sanford C. Bernstein & Co. said.

“We are bullish on the medium term prospects for natural gas,” Bernstein analysts led by Neil McMahon said in a report today. “Slow resource development should keep the market tight going forward.”

Bernstein last week lowered its gas price forecasts for 2009 and 2010 and its predictions are higher than industry consensus that global demand will fall back to 2007 levels this year, as the weakening global economy reduces demand.

According to the report, four factors will support gas prices in the coming years. Fears of a collapse in LNG prices are overblown, Russian output doesn’t appear to be growing, the Middle East is struggling to supply itself and U.S. onshore production appears to be slowing, it said.

“We remain significantly less pessimistic than many, as the fundamental drivers of higher gas prices remain in place,” the report said.

Bernstein is doubtful if Russia, Qatar and Indonesia can start up 55 million tons in new liquefied natural gas production capacity this year.

“The wave of new LNG expected this year may be more of a puddle than a tsunami, as delays to major projects kick in,” the report said.

Lacking Russian Investments

In Russia, supplier of a quarter of Europe’s gas, a lack of investment means new volumes won’t flow westward until at least 2013, Bernstein said. This may keep the gas market tight “in 2009 and beyond,” the report said. European buyers will turn to LNG to plug the supply gap.

Resource development in the Middle East has also been slow, Bernstein said, with some Middle Eastern countries building LNG import terminals to satisfy growing domestic demand.

In the U.S., the development of so-called unconventional onshore gas supplies will “rapidly slow” as the number of rigs is cut along with capital spending plans, due to the economic slowdown and lower U.S. prices. If demand stabilizes, this will be “supportive” of prices, it said.

Unconventional gas deposits are generally more expensive to develop and need a greater number of wells than conventional reserves.

New LNG supplies and lower demand for gas led Bernstein to reduce its 2009 global gas price estimate to $8 a thousand cubic feet from $8.75 and its 2010 forecast to $9 from $10. That’s more than the consensus estimates for the two years of $6.97 and $7.65, respectively, Bernstein cited in the report.

LNG Projects

From 2010 onwards, Bernstein said new supplies will be dependent on LNG projects in Australia, Nigeria, Venezuela and Iran.

“Our analysis leads us to believe that very few of the scheduled new trains will come online as planned in the next decade,” the report said. The LNG market will remain tight “for the foreseeable future.”

In Europe gas prices will recover if oil starts to rise by the end of 2009, due to the prevalence of oil-linked long-term supply contracts , Bernstein said.

“Over the next five years we expect natural gas shortages across Europe,” the report said. Russia may be required to supply 37 percent of total European demand, up from 28 percent at the end of 2007. Russia and OAO Gazprom, its state-controlled monopoly exporter, have been “overconfident in the production ability of existing core fields,” Bernstein said.

Europe faces a 50 billion cubic meter supply shortfall by 2015 as European gas production drops at a rate of 4 percent a year and demand continues to rise.

Negative U.K. Growth

In the U.K., Bernstein assumes a negative 1 percent gas demand growth this year, flat growth in 2010 and 1.5 percent growth in the medium term.

Non-domestic supplies are becoming “a more critical factor” in setting U.K. wholesale gas prices. Forty percent of Britain’s supplies this year will be imports, compared with just 2 percent in 2000.

“We see support for U.K. gas prices at today’s levels,” the report added. U.K. gas for delivery today declined 1.9 pence or 3 percent, to 60.4 pence a therm, according to broker ICAP Plc. That’s equal to $9.04 a million British thermal units.

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