By Keith Schaefer
First Energy analyst Martin King – whom I believe has called the natural gas market in North America better than anybody over the last two years – gave up on the likelihood of higher natural gas prices for the next 18 months in a report today, Aug 30.

“Let us reiterate: placing money in the natural gas investment space, aside from special one-time circumstances, is likely to be dead on arrival” he wrote this morning. He lowered his forecast for prices in the US for 2010 by 40 cents per million BTU, and in 2011 by a full dollar per million BTU (Mmbtu).

Back in February 2009, he was one of the very few calling for a spring rally in gas prices – but there was one. Throughout July and August 2009 he counselled investors that a big seasonal run was coming in natural gas prices and gas stocks – and he was right.

Today, King was even more negative on Canadian natural gas prices than in the US:
“Impacts for Canadian gas pricing are even more negative as we have also chosen to modestly widen the price spread between Nymex and Aeco prices over the same forecast horizon.” Canadian natural gas prices usually trade at a discount to the NYMEX price to account for the transportation costs to get western Canadian gas to New York. But lately that price spread has been getting wider.

In the US, the reason for the lower price forecast is simple: natural gas producers are still drilling, despite low prices.

In Canada, King’s reasoning for even lower prices than the US include one that I have been speaking about for months:

-increased pipeline capacity in the US that makes domestic gas very portable, and has opened up new markets (the Northeast US and California) for previously stranded Rocky Mountain gas in the US – the mainstream Canadian media have not reported on this – and the amount of Canadian gas that is being displaced by this – at all.

-increasing gas supply coming out of Western Canada, as the Montney, Horn River and gas saturated oil plays increase production. First Energy forecast an actual increase in Western Canadian gas production in 2011, which would be the first time since 2006.

-greater LNG import capacity in eastern Canada and the Northeast US.
King also spoke to a new pipeline taking Canadian gas down into the US at a time when the US market is having a hard time digesting all its own new home-grown supply.

In an entertaining 7 page report, he used the analogy of the supply side being a big dragon, and the only sword that could slay it is sustained low prices for 18-24 months.
“…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.”

Interestingly, natural gas prices rallied today – crawling back over $3/mmcf in Canada and up 11 cents to $3.74 in the US. Also, this last week of August marked the low price point for natural gas in Canada and the US for all of 2009.

(Keith Schaefer, Editor and Publisher of Oil & Gas Investments Bulletin, writes on oil and natural gas markets - and stocks - in a simple, easy to read manner. Courtesy: Oilandgas-investments.com)