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Merrill Lynch Lowers 2011 U.S. Natural Gas Forecast to $4.60 on Drilling

Bank of America Merrill Lynch cut its U.S. natural-gas price forecast for next year, citing a “well- saturated” market and higher-than-expected drilling rates.

The bank cut its estimate to $4.60 a million British thermal units, from $5 previously, analysts headed by Francisco Blanch in New York said in a report dated Dec. 3.

Natural gas has tumbled 21 percent in 2010 on the New York Mercantile Exchange as U.S. production, intensified by shale drilling, may jump 2.5 percent this year, according to the Energy Department. The number of natural-gas rigs operating in the U.S. rose by eight to 983 between Nov. 24 and Dec. 3, according to Baker Hughes Inc. Merrill said it expected the gas rig count to drop to 750 by the end of 2011.

“Rigs need to fall by at least 20 to 25 percent over the course of 2011 in order to significantly slow the pace of new supply and thus support prices,” the bank said.

Forward prices for the fuel are too low and there is “upside” to prices from 2013 onward, Merrill said.

Storage inventories may reach 2 trillion cubic feet by the end of March, according to the report. That may mean an increase in gas-price volatility next year, Merrill said.

A decline in industrial gas demand growth to 4.6 percent in October from 14 percent in May means there will need to be more coal-to-gas switching in U.S. power generation for supply and demand to balance, the report said.

The gas balance “will remain weak in 2011, given low demand, record inventory levels, strong supply growth and continued drilling activity,” Merrill said.

Low U.S. gas prices mean reduced imports from Canada. In the northeast Canadian gas imports have fallen 50 percent from a year earlier, according to the report, to less than 1 billion cubic feet of gas a day.

Prices will remain low enough for liquefied natural gas shipments to go elsewhere in 2011, Merrill said.

To contact the reporter on this story: Ben Farey in London at bfarey@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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