U.S. natural gas output, fueled mostly by the supple Marcellus and Utica shales, is proving no match for demand, as Goldman Sachs on Wednesday reduced its outlook for domestic natural gas prices for the second time since late July.
In late July analysts Damien Courvalin and Raquel Ohana said they expected 4Q2015 prices to average $2.70/MMBtu (see Daily GPI, July 27). But prices aren't holding up.
"The U.S. gas market has remained even more oversupplied than we forecast in late July," the duo said. "Since then, U.S. inventories have built by 850 Bcf (weather adjusted) versus our 805 Bcf forecast (July 31 to Oct. 9). As a result, inventories are currently at their highest level for this time of the year since 2012 and prices have fallen to $2.50/MMBtu, below our 4Q2015 $2.70/MMBtu forecast."
Exports, coal plant retirements and new petrochemical plants should support demand growth in 2016, while associated gas continues to decline. However, continued robust growth in the Northeast, limited declines in base production and a more oversupplied 2015 gas market lead analysts to instead raise 2016 coal-to-gas (C2G) switching requirements.
As a result, the analysts now are forecasting 2016 New York Mercantile Exchange gas prices to average $2.85/MMBtu versus a July forecast of $3.00 and be below the forward curve through 2Q2016.
"We expect natural gas prices to break away from displacing Powder River Basin coal in 3Q2016. Longer term, we believe that continued efficiency gains in shale drilling will help accommodate the demand phase of the shale revolution with prices at $3.00/MMBtu."
U.S. gas production growth is looking stronger than expected. Goldman predicts growth of 4.2 Bcf/d this year, compared with an earlier forecast of 3.8 Bcf/d, while demand growth is seen at around 3.5 Bcf/d versus 3.6 Bcf/d. C2G switching now is estimated at 3.9 Bcf/d versus 3.6 Bcf/d. C2G switching is forecast at 2.2 Bcf/d net in 2016, up from 1.7 Bcf/d previously.
Goldman's forecast for the end of injection season inventory has been reset to 4.0 Tcf from 3.915 Tcf, while the end-of-March forecast has risen to 2.072 Tcf from 1.91 Tcf. By the end of October 2016, inventory is seen at 4.018 Tcf versus a previous forecast of 3.84 Tcf. Monthly inventory data posted by the Energy Information Administration "point to a balance over July-September [that is] 0.7 Bcf/d softer than we had forecast, driven by both resilient production and disappointing demand," said analysts.
"Industrial demand has continued to disappoint, flat since June, down 0.4 Bcf/d from last year's level in 3Q2015 and 0.7 Bcf/d below our forecast. In turn, production has continued to set new highs," up 0.5 Bcf/d versus 2Q2015 and plus-0.8 Bcf/d versus a previous forecast.
Associated gas production is forecast to continue to decline, but the Northeast should more than make up the difference. Given the expected large increase in Northeast pipeline takeaway capacity over the next few months, "we expect prices to remain near their current low levels into year-end," the Goldman team said. "Since we expect Northeast production to only fill 70% of new local offtake capacity in November-December, risks to our production forecasts are skewed to the upside."
There's another downside, too. Even if the forecast is correct, gas inventories could increase more in November if weather remains milder-than-normal, as is forecast with the El Nino weather pattern taking shape.
"In fact, while extended forecasts point to only slightly warmer than normal months of November and December, the ongoing strong El Nino weather pattern creates risk of potentially warmer weather. As a result, we see risks as clearly skewed to another leg lower in gas prices in coming weeks."
Moody's Investors Service also has a lower-for-longer price assumption for North American natural gas. The credit ratings firm reduced its price assumptions at Henry Hub by 25 cents overall, to $2.75/MMBtu in 2016; $3.00 in 2017 and $3.25/ in 2018.
Moody's also lowered its assumptions for natural gas liquids (NGLs), which tend to move in line with oil prices. The rating agency now forecasts NGL prices of $18/boe in 2016, $20 in 2017 and $22 in 2018, with a medium-term price of $25/bbl.