Barclays Forecasts U.S. Natural Gas Prices Will Remain Around $4 This Year

U.S. natural gas prices may remain at about $4 per million British thermal units in 2011, according to Barclays Capital.

While gas may slide to as low as $2 per million Btu in the short term, “concerted demand and supply reactions would restore prices” to near $4, Barclays said in a research note dated yesterday. Power plants may substitute coal with gas as the fuel turns cheaper, arresting the slide.

“Coal displacement will increase in 2011, back to levels similar to 2009,” said New York-based analyst James Crandell in the report. “While well-hedged producers will continue drilling in a $4 gas market, we expect that in a $2 market, not only would a wave of producers revisit drilling budgets, but a number would also consider shutting in existing production.”

Utilities burnt more than 3.5 billion cubic feet a day of additional gas in 2009 to displace coal, with such substitution declining to less than 2.5 billion last year, according to a graph in the report. The displacement may equal levels reached in 2009, Crandell said.

The U.S. Energy Department lowered its 2011 average gas price to $4.14 a million British thermal units from $4.46 on expectations of a storage overhang this year, according to the January Short-Term Energy Outlook. The agency has trimmed its 2025 forecast to $5.46 from $6.35, the 2035 forecast to $6.53 from $8.06 and expecting prices little changed through 2020.

Natural gas for February delivery rose 2.7 cents to trade at $4.452 per million Btu today on the New York Mercantile Exchange. The futures have declined 20 percent from a year ago.

Power-station coal at Newcastle, the benchmark for Asia, gained for a seventh week to the highest since September 2008, according to IHS McCloskey, a Petersfield, U.K.-based provider of coal data. Prices jumped $6.70, or 5.1 percent, to $138.50 a metric ton in the week ended Jan. 14. Coal climbed 42 percent in the past year.

The U.S. Energy Department may report a withdrawal of 235 billion cubic feet of gas from storage for the week ended Jan. 14, bringing total gas in storage to 2.7 trillion, Credit Suisse AG said in a report yesterday.

To contact the reporters on this story: Alexander Kwiatkowski in Singapore at akwiatkowsk2@bloomberg.net; Dinakar Sethuraman in Singapore at dinakar@bloomberg.net

To contact the editor responsible for this story: Jane, Ching Shen Lee at jalee@bloomberg.net

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