Mark Lacey (Investec Asset Management): US natural gas is ripe for rebound

“In contrast with the strong performance of oil in 2009, the US natural gas market has seen steady downward pressure - and looks ripe for a rebound, says Mark Lacey, Global Energy portfolio co-manager at Investec Asset Management. “‘Onshore overproduction of gas has been met with declining industrial demand,’ he says. ‘While long-term US gas prices - 2011 and beyond - are above $7.20 per million British thermal units, spot prices have collapsed to about $3.80. This is the equivalent of about $23 a barrel of oil, making gas by far the cheapest source of energy in the US.’ “Mr Lacey argues that a potential rebalancing of the supply/demand equilibrium could push the US gas market from oversupply in 2009 to a slight deficit in 2010. And, without a pick-up in drilling activity from current levels, this deficit could widen even further in 2011. ‘In this downturn, the cut in drilling activity has amounted to 54% in just seven months. “‘If gas prices remain at current levels, we do not expect activity to increase meaningfully in 2009,’ he says. “‘Although we forecast that industrial demand will be weak in 2009 and potentially 2010, we believe this bearish scenario is now fully reflected in the market and that the current low levels of gas prices are unsustainable relative to coal and oil. “‘Could it now be time for investors to stop overlooking the US natural gas market?’”