The prospect of a natural gas glut this winter has sent U.S. natural gas prices crashing, leading another investment bank to slash its price forecast for the fourth quarter, this time by 50 cents.
Bank of America Merrill Lynch Global Research analysts said a multitude of negative micro dynamics have overtaken the domestic gas market, led by excessively high inventories and continued strong production, along with softer-than-anticipated industrial demand and mild weather.
"These factors have flattened the normal seasonality and kept spot gas prices in a narrow trading band of 40 cents/MMBtu in the past three months," analysts said. "A rising storage surplus may keep prices at the bottom of the seasonal range in coming months.”
On those expectations, the 2015 price target has been reduced by 50 cents to $3.00, and average 4Q2015 prices are expected to average $2.70, down from a previous forecast of $3.20.
However, analysts said they remain convinced of a "fundamentally positive outlook" by the second half of 2016 and beyond. Goldman Sachs had expected U.S. prices to average $2.70/MMBtu in the fourth quarter, but last week noted that prices already had fallen below that price (see Daily GPI, Oct. 21).
A lot of the issue has to do with continued strong output from the Northeast, say analysts. However, "lower prices this winter also imply less production in the future," said the BofA Merrill team.
"Output in the Northeast has already failed to keep up with growth seen over the past four years, a function of local basis prices trading in a weak 80 cents to $2.00/MMBtu range since end of March. The lack of growth stands in contrast with the ramp-up of new pipeline takeaway capacity that has already happened throughout this year.
"Front-month futures are trading at $2.29/MMBtu, the third lowest in a decade, while long-dated prices have also come off sharply," said analysts, pointing to three short-term negative dynamics:
Soft end-user demand on sluggish industrial growth/mild weather; and
High production, even if it has flatlined lately.
Still, the BofA Merrill analysts said they could find no "structural causes" behind the decline in longer-dated prices.
"We continue to believe that anticipation of lower Lower 48 output in 2016, combined with an excessively large amount of net short spec positions should allow for a price rebound to $3.00/MMBtu by year-end," said analysts. "Judging by U.S. natural gas prices [currently], we should be in spring.”
New York Mercantile Exchange front-month futures recently fell to a low of $2.29/MMBtu, the third lowest in 10 years "and completely at odds with the normal seasonal trajectory."
Unseasonably warm weather has been pervasive, and "El Nino fears are rife," analysts noted. "Some forecasts are looking for above-normal temperatures in all of November which, if materialized, constrains near-term heating demand. An extended shoulder season with limited demand and strong production is always a recipe for price weakness, perhaps even more so at a time of excessively high inventories."