New York (Platts)--30Dec2008

The gas market in North America likely will remain in an oversupplied
state, creating downward pressure on prices, until at least 2010 before a
sharp fall in rig counts helps bring the market back into balance, according
to Stephen Smith, principal of Stephen Smith Energy Associates.

In his latest monthly outlook, the Natchez, Mississippi-based consultant
noted that "global financial panic and related concerns about global oil
demand," have lowered global prices for crude oil and residual fuel oil and
have pushed gas prices somewhat lower in sympathy.

As a result, Smith has lowered his average 2009 gas price 14% to
$5.75/MMBtu and his average 2010 price 9% to $6.25/MMBtu.

Although anticipated OPEC production cuts eventually should break the
fall in oil prices and lend marginal support to gas prices, "reduced gas
production capacity, achieved [through] lower rig counts, will still have to
be the main source of restoring gas market balance," Smith said.

He estimated that the gas rig count will need to fall to a range between
1,000 and 1,100 -- down from 1,347 as of December 26 -- and hold that range
well into 2010 before balance is restored.

Smith also noted that the growing gas storage surplus is weighing heavily
on prices. "Weather surprises aside, we expect the pressure from this
growing storage surplus to keep Henry Hub prices below $6/MMBtu for much or
all" of 2009, he said.

Even with some weather surprises, the declining crude oil price will make
oil more competitive in Asia with liquefied natural gas, lowering LNG demand.
Lower economic activity worldwide also will further reduce global LNG demand
and prices.

As those prices fall, "LNG imports to the US are likely to increase as
2009 progresses," Smith noted. "This implies that the task of rebalancing
supply and demand in the North American gas market is not entirely a question
of waiting for lower rig counts."

Smith said he anticipates seeing an oversupplied North American gas
market throughout next year and well into 2010, with average Henry Hub prices
holding largely between $5/MMBtu and $6.50/MMBtu.

Smith predicted an average price of $5.50/MMBtu in first-quarter 2009,
$5.30/MMBtu in Q2, $5.90/MMBtu in Q3 and $6.35/MMBtu in Q4.

The trend toward lower prices has stimulated gas-fired power generation
in the last few months of this year, Smith noted. Nevertheless, the analyst
said he still anticipates a slight decline in total gas-fired generation for
2008.

Total generation should be even lower next year -- even with muted gas
prices -- in part because of a "much weaker industrial sector," Smith said. If
"unusual heat shows up" next year, however, that assumption could change.


--Melanie Tatum, melanie_tatum@platts.com