Goldman Sachs analysts on Monday cut their forecast for 3Q2015 U.S. natural gas prices by 55 cents and dropped 4Q2015 expectations by 50 cents.
Weak industrial demand and elevated production require gas to price against Powder River Basin (PRB) coal to burn excess supply, said analysts Damien Courvalin and Raquel Ohana. The updated supply/demand balance and expectation for only a gradual recovery in industrial demand, given normalized Northeast production, require "similar high levels of price-induced coal-to-gas switching through the fall," they said.
Given the updated supply and demand estimates, Goldman analysts expect New York Mercantile Exchange gas prices to average $2.75/MMBtu in the second half of this year, trading below PRB. Analysts had expected gas prices to average $3.30/MMBtu in 3Q2015.
"Given an additional 2.8 Bcf/d of Northeast pipeline debottlenecking due at the end of the year, we forecast 4Q2015 prices will trade a little below summer, following a similar pattern to this winter," they said. The new 4Q2015 forecast is for prices to average $2.70/MMBtu, versus a previous outlook of $3.20.
A warm summer could push prices higher, but the upside would be limited by low Appalachian coal prices following recent coal plant retirements and an extended period of market share loss to cheaper gas. "In fact, the historical distribution of remaining summer weather puts the likelihood of gas rallying sustainably above $3.00/MMBtu at less than 6% with the average El Nino impact pointing to a potentially cool rest of summer," said Courvalin and Ohana.
The Goldman duo still expects "strong, broad-based gas demand growth" for next year, given more coal-fired retirements, new petrochemical plants, liquefied natural gas (LNG) exports ramping up and on increased exports to Mexico, against slowing associated gas production.
However, the "sequential improvement in fundamentals" won't stem "the growth we forecast will apply from a lower level of 2015 demand than we had previously embedded and we now expect that gas prices will continue to compete against coal prices," said Courvalin and Ohana.
Goldman's updated gas fundamental outlook "is ultimately more oversupplied than we had laid out earlier this year," with the required coal-to-gas switching rising to 3.6 Bcf/d in 2015, or plus-9 MMcf/d, and 1.7 Bcf/d in 2016, or plus-8 MMcf/d.
The 2016 forecast was cut by 50 cents/MMBtu to $3.00/MMBtu on average, "below the current forwards, with gas only breaking away from PRB coal in early summer." Prices in 1Q2016 now are expected to average $2.65/MMBtu versus a previous forecast of $3.50.
The updated price forecasts by Goldman account for the firm's cross-commodity implications for the "new oil order," Courvalin and Ohana said.
"Despite slowing associated gas production, oil service cost deflation reduces shale gas breakevens while a sustainably lower oil-to-gas ratio increases the appeal of drilling for gas versus oil, and delays/reduces industrial demand growth. This demand weakness is further exacerbated by our interrelated low oil and strong U.S. dollar forecasts."
A sharper reduction in U.S. oil production represents an upside risk, but "we believe that risks is of limited magnitude," given that the marginal cost forecast is $3.50/MMBtu, driven by continued efficiency gains in shale drilling and a weak coal price environment.
Bank of America Merrill Lynch (BAML) analysts are more optimistic about U.S. gas prices through 2016. In a separate report issued Friday, analysts said they expect prices to average $2.80/MMBtu in 3Q2015 and average $3.40 in the fourth quarter. For 2015, the average price is expected to be $2.85/MMBtu, rising to $3.90 on average in 2016.
"U.S. natural gas prices will face further weakness this summer as ample inventories and high production put pressure on prices," said the BAML analysts. "We have an end of 2Q2015 target of $2.25/MMBtu and a 2015 average forecast to $2.85. Next year we expect prices to recover as the market rebalances, and we forecast natural gas prices to average $3.90/MMBtu in 2016."
BAML analysts are forecasting "downward pressure continuing as the global LNG market will likely remain very oversupplied in the second half of 2015 and in 2016. Asian spot LNG prices could temporarily drop below $6.00/MMBtu in the second half of 2015 as new Australian supply starts up."
Analysts also noted that the "fast-cycle onshore production is rolling over" for onshore oil. It's taken longer than expected, said analysts, as zero interest rates, cost declines, hedges and efficiency improvements have provided protection to the tight oil producers.
However, "the impact of these factors is wearing off now as the plunge in the rig count, reduced well completions and declines in capital expenditures are now finally having an impact on shale output."
By the fourth quarter, "the declines in shale output should also be visible on an annual basis. We now see outright declines in U.S. oil production next year...Thereafter, any upturn in production in 2016 may be much shallower than we previously anticipated."
Last week Sanford Bernstein analysts said they expected domestic gas prices to trend toward a $3.75/Mcf average in 2016 as oil-associated gas production drops off" (see Daily GPI, July 23). "However, we believe that there is a large amount of gas that becomes economic at prices above $4.00/Mcf and therefore do not expect gas prices to go beyond that level for the foreseeable future."