U.S. natural gas prices should hit $4.00/Mcf by the end of 2015, four years earlier than forecast, reflecting reductions in the total rig count and lower associated output, Tudor, Pickering, Holt & Co. (TPH) analysts said Thursday.
Just two months ago, TPH reduced its long-term gas price forecast by 50 cents to $4.00, in part because continuing supply growth was not expected to be matched by demand (see Daily GPI, Nov. 14, 2014). Prices in 2015 were forecast at that time to average $3.35, with 2016-2018 prices averaging $3.50. Prices then were seen moving higher, in part on gas exports.
Under the new scenario, long-term gas prices remain at $4.00/MMBtu, "but we are now forecasting getting there much earlier," wrote analysts Brandon Blossman and Matt Portillo. "We see $4.00 gas now by the end of 2015, versus a previous view that 2019 was the first year we'd see sustained $4.00 prices."
The updated price deck reflects "further reductions in associated gas supply," with TPH expecting the overall U.S. oil and gas rig count to fall by 800 this year. Also incorporated into the revised price outlook are lower Appalachia Basin gas production assumptions, based on "poor wet gas economics," as well as wide Northeast basis pricing, limited capital markets access and pipeline capacity constraints. No material changes are expected on the demand side.
TPH's gas price assumptions for 2015 are $1.00 higher than a revised forecast issued earlier this month by Raymond James & Associates (see Daily GPI, Jan. 5). Raymond James at that time cut its long-term gas price forecast to $3.75 from $4.25.
According to Blossman and Portillo, a "gas production response to current soft prices (and wide Northeast basis) won't significantly impact fundamentals until 2016, so 2015 balancing item continues to be coal versus gas market share, and that game is all about relative price." To balance the market within the year, a $3.40/MMBtu price is required. However, reductions to the oil-directed rig count in turn should tighten this year's gas market forecast.
In the mid-term, defined as 2016-2017, the associated gas/gas-directed rig count declines should slow gas growth significantly, said the analysts. Weak gas prices in the first six months of 2015, wide basis in Appalachia and "degraded" gas liquids economics would drive the supply response in 2016.
The combination of impact should result in 1.5 Bcf/d less gas supply this year and 3 Bcf/d less supply in both 2016 and 2017, according to TPH. "A tighter market drives marginal economics back toward coal-fired generation, requiring a higher market clearing gas price."
Market fundamentals "are just awful," and that won't change until the last half of this year, said Blossman and Portillo. Some exploration and production (E&P) companies had planned to draw down a backlog of uncompleted wells into December on "anticipated stronger winter demand and pricing," following last year's freezing temperatures, said the analysts.
However, it appears that many E&Ps "had the same idea, which turned a great idea into a not so good one."
The production ramp-up into December damaged Northeast supply and demand "to the point that basis is worse today in the middle of winter than it was in the shoulder season," said the TPH analysts. "That quick ramp in supply makes for a very oversupplied market (seasonally adjusted) with recent storage withdrawals running well shy of historic norms."
For the week ended Jan. 9, the U.S. Energy Information Administration (EIA) reported on Thursday a decrease of 236 Bcf in U.S. gas storage, about 15 Bcf above estimates (see related story). Inventories stood at 2,853 Bcf -- 282 Bcf higher than last year and 113 Bcf below the five-year average.
The EIA this week said it expects the Henry Hub spot price to remain under $4.00/MMBtu until the fourth quarter of 2016 (see Daily GPI, Jan. 13).
Meanwhile, Moody's Investors Service on Thursday lowered its pricing assumptions for Brent and West Texas Intermediate (WTI). Brent crude now is expected to average $55.00/bbl through 2015, rising to $65 in 2016 and $80 in the medium term. WTI was cut to $52.00/bbl in 2015 and to $62 in 2016; it also is $75.00 for the medium term.
"At the start of 2015, crude prices of about $50.00/bbl reflected factors including growing non-OPEC supply, supply outpacing demand worldwide and Saudi Arabia's decision not to keep acting as OPEC's swing producer," said Moody's Managing Director Steve Wood. "While we see no catalysts that would change the supply-demand equation in the near term, our long-term oil price assumptions reflect our view that prices will eventually rebound."