NEW YORK (Commodity Online): It looks like storage problems is raising its head again in US natural gas markets with the result,  the near-term strength in prices seems unlikely to last.

Bank of America-Merrill Lynch (BA-ML) has revised its Q3 and Q4 forecasts to $3.80 and $5/MMBtu, respectively from $4.20 and $5.90/MMBtu as forecasted in March. If storage congestion gets worse, Henry Hub natural gas may even dip below $ 3/MMBtu. However, its long term view of the commodity remains unchanged at $6/MMBtu in 2010.

Lower natural gas prices could impact by way of reduced drilling and severe storage constraints might surface in some areas, causng cash prices to sink. In turn, lower nat gas prices ould hurt Henry Hub and force further production shut-ins.

Eventually, the ensuing recovery in the United States will have an impact on gas intensive industrial goods. Substitution in the industrial sector and the clean energy agenda of the Obama administration could help revive demand in 2010.

According to BA-ML analysis, steep depletion rates in conventional fields will pull US natural gas production towards unsustainably low levels by the first quarter of next year. Uncertainty around global LNG supply volumes remains the biggest
risk to our more constructive view for US natural gas prices next year.

Looking forwards there are several factors supportive of US natural gas. One is the economic recovery and fears of a rush of LNG imports receding. With natural gas production falling, a bullish sentiment was created as oil prices rose $75 and that in turn pushed NYMEX natural gas prices above $4.

Supplies of natural gas are still high compared to demand and an equilibrium is yet to be reached. Although a production slowdown is now finally visible—growth halved from +3% YoY in Q1 to 1.5% YoY in Q2 to -2% in July—the level is still too high relative to demand.

Lower production costs are pushing up production in Haynesville, Marcellus, Fayetteville and the new colony and with storage crisis, spot prices may sink, Prices in the Rockies and South West as well as Aeco in Canada are already extremely depressed, with the Opal Hub trading below $3/MMBtu.
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The weakness in these producing regions is spreading to some demand centers as well. The newly expanded 1.8 bcf/d Rockies Express East pipeline is now extended into Ohio, spreading some
of the gas sourced from the oversupplied Rocky Mountains region farther East to some major consuming centers in the midwest.

Imports from Canada are expected to increase and higher imports will make it tough to rebalance overall US supply in the absence of further production curtailments.

Coal to gas switching by power utilities have helped to create demand incrementally for nat gas. MA-BL pointed out that despite short term weakness the market is set to average to $6/MMBtu in 2010.

Industrial gas demand in US is expected t pick up in such sectors as aluminium andplastics and low auto inventories. Total US nat gas production is now clearly declining, and the lower volumes will soon start to impact fundamental balances. Depletion is approaching 40% in conventional fields. Production from vertical gas wells in Texas is already in steep decline. If the industrial gas demand picture improves by year-end, the overhang of gas should then start to clear by Q2, lending significant support to US nat gas prices in 2010.

Other positive trends include withdrawal of recessionary winds from LNG-importing countries such as China, India, Korea and Taiwan. The market for LNG looks uncertain which also impacts any analysis of natural gas prices in the medium term.

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