Washington (Platts)--2Jul2009

A "race to the bottom" in the natural gas market is almost complete, and
the industry is now waiting for signs that the cutback in drilling rigs or
lower imports of liquefied natural gas will have a meaningful impact on the
supply and demand balance, an analyst firm said late Wednesday.

Barclays Capital analysts in a report examined the overall state of the
gas market from three angles--rigs, LNG and storage--and noted that recent
strength in prices has taken place "against a backdrop of otherwise weak
fundamentals."

While it said the downturn in drilling rigs has been much sharper than
many had anticipated, gas supplies remain abundant. From a peak of over 1,600
rigs some seven months ago, the US rig count plunged 56% to 692 last month,
representing a much steeper decline than Barclays had expected.

"Yet neither monthly [production] data nor weekly storage numbers are
showing tightening balances so far," the firm said. "Meanwhile, the
combination of falling costs, stronger forward prices and increasingly
accommodative capital markets [are] causing concerns about a premature rebound
in drilling."

The firm noted that operators this year shut in rigs primarily in
marginal plays and migrated instead to lower-cost, high-return projects, such
as the Haynesville Shale in Louisiana.

Barclays said it believes the rig count is at a turning point, noting
that it could fall by another 150 rigs before the end of 2009 or could rebound
given improving capital markets and more favorable gas prices.

Barclays' baseline scenario anticipates the gas rig count bottoming out
at 650 rigs, with essentially no year-on-year production growth in 2009 and a
3.3 Bcf/d contraction in 2010. By October 2010, storage inventories would be
"in a fairly bullish position," setting the stage for a greater price
recovery.

Meanwhile, the firm said it expects the economically driven downturn in
industrial demand to hit bottom this year. "Our economists expect
industrial production to turn higher in [the third quarter], which should also
improve industrial gas demand."

LNG imports are also potentially supportive for the gas market, Barclays
said. With the LNG market behaving "in a truly global fashion" this year, a
considerable amount of the liquefied fuel has gone to Europe, rather than
to US terminals.

While some analysts had anticipated a flood of LNG to hit US shores this
year, imports averaged 960,000 Mcf/d in the first quarter, up just 130,000
Mcf/d from the same period of 2008, Barclays said.

"Some of the global LNG demand weakness is offset by lower-than-expected
supply growth as liquefaction projects coming online this year continue to
face delays," the firm said, noting, for instance, that the first "mega-train"
in Qatar is finally ramping up after shutting down in March shortly after its
commissioning.

And given current price differentials, Barclays expects only modest
growth in LNG imports into the US through the remainder of the year,
predicting 1.5 Bcf/d for Q2, 1.8 Bcf/d for Q3, 2.2 Bcf/d for Q4 and averaging
1.6 Bcf/d for all of 2009.

The state of US storage is more bearish over the near-term, Barclays
said, noting that inventories in the producing region and the West are each
less than 300 Bcf from maxing out. If injections continue at an aggressive
pace, these regions will fill up swiftly and divert gas to the East, which
"has more space, with over 1,000 Bcf of room to go," the analysts said.

Still, strengthening of the forward curve has occurred sooner than
anticipated, Barclays said, and this is enabling producers to begin hedging
more substantially.

"[S]hould calendar 2010 prices keep rising, it would allow more sizeable
hedge programs to be put in place, prompting producers to launch more
ambitious drilling programs next year or even late this year, and thus
limiting price recovery in 2010," Barclays said.
--Jessica Marron, jessica_marron@platts.com