Upstream capex cuts hold the potential to address near-term oversupply in North American natural gas and improve 2009 balances, says Stephen Richardson, analyst at Morgan Stanley & Co. Inc. Lower rig counts are likely to take about three to four months before the supply impact is felt, but, using the cuts of 2001 as a roadmap, makes clear the potential for a material tightening of the supply and demand balances by the second half of 2009, he says. The market remains exposed to near-term challenges of continued robust supply, winter weather, and weakening demand patterns. However, and perhaps more important for the equities, Richardson sees the potential for a change of sentiment towards North American gas as "evidence of producer discipline mounts." Compared to widely held near-term bearish sentiment towards crude, the gas market looks well positioned, as production is likely to adjust to lower prices (and tighter credit) to restore balances. Also, with an increasingly challenged domestic economic outlook for next year, a key offset will be slowing gas demand (and in some cases, contraction) in key demand segments. His model suggests lower year-on-year weather-adjusted demand in both the industrial and electricity generation segments (based on the firm's U.S economics 2009 GDP outlook of -0.2%). However, due to changes in the structure of demand centers since the last economic contraction, predicting demand impacts of an 2009 recession remains "more art than science." Despite improving clarity on 2009 balances, key near-term challenges remain. First, basis, particularly in the Midcontinent and the Rockies, remains an issue as key transport and storage outages have severely impacted regional prices. Second, frac margins have declined due to natural gas liquids oversupply and lower crude prices. Finally, additional liquids in the gas stream may increase near-term supply.