Given recent gas-storage levels and higher rig counts, the new gas-price forecast for 2010 is $6.20 per thousand cubic feet (Mcf), according to David Pursell, managing director and head of macro research for Houston-based Tudor, Pickering, Holt & Co. Securities Inc. (TPH). The forecast represents a steep drop from the investment firm's third-quarter 2009 prediction of $7.50 per Mcf.

Making his earlier prediction, Dan Pickering, co-president and head of research for TPH, said, "Gas prices will be a pleasant surprise in the near term. If prices begin to improve, people will think they will keep improving, but I think supply will also start to rise."

Pickering noted that, at the time, the 2010 Nymex strip showed an estimated $5.75 per Mcf, yet the Pickering team forecast an optimistic $7.50 for 2010. For 2011, the strip showed $6.60, compared to the firm's $6.50.

Currently, first-quarter 2010 gas prices are expected to average $5.25 per Mcf, predicts Pursell, noting that the current forecast is "well below our $7 per Mcf forecast based on our August 2009 supply study."

In his Commodity Price Update of March 9, Pursell pointed out that rig-count growth had been stronger than anticipated.

"In our gas-supply study of August 2009, we assumed gas prices would have to increase above our long-term $6.50 per Mcf level to encourage increased drilling activity. We could not have been more wrong. The gas-directed rig count is up 55% since late May 2009, even as gas prices averaged only $4.50 per Mcf. Horizontal gas-directed drilling, especially in the shale plays, increased by 75%, and is now higher than the 580 rig peak seen in October 2008."

For this year, TPH predicts first-quarter gas prices to hover near $5.25 per Mcf, based on bid-week pricing, versus the firm's previous forecast of $7. Also, the firm's previous second-quarter forecast for $8 per Mcf "is a huge and unrealistic hill to climb" from the current gas price of sub-$5 per Mcf. TPH's new estimate is $6.50.

So why $6.50 and not lower? According to Pursell, "Given the current sub-$5 per Mcf natural gas price, we were briefly (OK…maybe more than briefly) tempted to 'throw in the towel.' However, several factors prevented us from capitulating in 2010. The weather normalized, gas-storage data is tighter than a year ago (by about 4 billion cubic feet per day) and in line with long-term norms, such as a balanced market. This suggests production is declining at a higher pace than the EIA-914 (Energy Information Administration) monthly data suggests."

Meanwhile, E&Ps are starting to concentrate on oil, he notes. The oil-directed rig count has risen from the trough of late May 2009. With prices sticking to $80 per barrel oil and sub-$5 gas, the oil-rig count should grow and the pace of gas-directed drilling should slow.

TPH is maintaining its long-term gas-price forecast at $6.50, based on its marginal-gas-supply analysis, and believes that shales are a "game-changer" for the U.S. gas markets.

"We expect rig-count growth to moderate in the coming weeks or months. If the recent pace of growth does not slow soon, and the gas-directed rig count exceeds our projected equilibrium of about 1,100 rigs, there could be a downward bias to our 2011 outlook of $6.50. But it is way too early to make that call," said Pursell.

TPH also increased its Nymex oil-price forecast for 2010 to $68.75 per barrel, up from $60, and predicts $75 oil for 2011 and $90 for 2012 and beyond. "We are encouraged by signs of economic growth, but we will be patient before we increase 2010 and 2011 prices."