Things are already ugly in U.S. natural gas markets, and its only going to get worse, according to research firm Sterne Agee. SA analysts Tim Rezvan and Truman Hobbs argue that the double whammy of continued supply growth amid weak demand mean that natural gas prices are still not done dropping, and slash 2015/2016 estimates across the board for the natural gas firms in their coverage universe.

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Rezvan and Hobbs lower their 2015/2016 Henry Hub natural gas forecast “to $2.70/$3.20 per mcf from $3.40/$3.70. We also trim our 2015/2016 WTI forecast to $58/$65 from $63/$70. The glut of oil and gas in the U.S. will require a lengthy, at times painful, healing process for coverage companies and E&P investors. Investors should remain bottoms-up focused, commodity agnostic, and prepared to look beyond 2015 gas price woes.”

Natural gas prices likely to stay depressed well into 2016

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The Sterne Agee report warns that natural gas prices are likely to stay low for at least a year or two. The SA analysts argue that natural gas in storage will continue trending above historical averages for the next few months given record gas production from Appalachia. Moreover, supply growth is keeping a lid on Henry Hub gas prices and this weakness will last at least through this summer. They project that “spot prices of <$1.50/mcf will be the norm in many Appalachian hubs this summer, and expect operators without takeaway solutions to consider shut-ins as local pricing struggles to exceed transportation costs to move gas to local pricing hubs.”

Ongoing major reduction in oil rig count will lower “associated gas” production

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The SA analysts also discussed the potential impact of lower associated gas production from oil drilling as the oil rig count drops in their report. They note that conversations with clients have revealed uncertainty about how much oil drilling has driven natural gas supply growth. After sifting through the data, Rezvan and Hobbs found oil drilling is clearly connected to a good bit of the increased supplies of natural gas in the U.S. They specifically look at data regarding associated gas production in Texas and conclude that the ongoing major reduction in the number of oil rigs would eventually lead to a corresponding drop in associated gas production, but it will take a few quarters for the process to unfold.

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