Continuing supply growth, unmatched in the next couple of years by significant demand increases, has led leading Tudor, Pickering, Holt & Co. (TPH) to cut its long term price forecast by 50 cents to $4.00/Mcf.
Analysts updated the price deck to incorporate changes in associated gas supply driven by TPH's recent revisions to the oil supply forecast -- down on the recent crude oil price slump. Analysts also considered the current gas rig count, rig efficiencies and well economics expectations.
On the demand side, recent liquefied natural gas (LNG) export project announcements "have us incrementally more bullish on export volume online by 2020," wrote TPH's Brandon Blossman and Matt Portillo. "However, that demand increase looks more than offset by incremental supply growth."
The period from 2015 through 2018 is seen as weak "but not a disaster," with prices rising to $4.00 on LNG demand ramp. Prices in 2015 now should average $3.35/Mcf, with 2016-2018 prices around $3.50. For 2019 and beyond, with LNG exports ongoing, prices are seen higher at around $4.00.
There's too much gas supply to provide price support at $4.00/Mcf "until meaningful slugs of LNG exports hit later in the decade," wrote the TPH duo. "However, 2015 is not quite as bad as the near-$3.00 price we'd recently expected."
The Energy Information Administration doesn't expects Henry Hub spot prices to average above $4.00 this winter. It now expects average prices to be $3.97/MMBtu down more than 12% compared with $4.53/MMBtu in winter 2013-2014 (see Daily GPI, Nov. 12).
Northeast gas growth so far has proven to be insensitive to price, and they should continue fill pipeline commitments until capital markets say "no mas," said Blossman and Portillo.
The gas rig count in the TPH model drops meaningfully in other dry gas plays, including the Fayetteville and Haynesville shales, and the Piceance Basin and Pinedale Anticline.
"However, in general, with so little current dry gas activity outside of those basins, there is little left to be cut," said the TPH team.
Societe Generale analyst Breanne Dougherty also highlighted the fact that U.S. gas output already is up 4 Bcf/d year-on-year "and as heating loads rose this week, so did Canadian imports," making the market well supplied.
Domestic gas production is continuing to average more than 70.3 Bcf/d, almost 1 Bcf/d higher than the September average and 4 Bcf/d higher than in November 2013. "We see further growth on the horizon," said Dougherty in a note Friday. She is forecasting a December contract neutral price of $3.95-4.10/MMBtu, in line with expectations.
"This rest of the winter strip looks a little strong relative to base-case, but bearish pressure is less pronounced through mid-December than it was three weeks ago."