The chances that natural gas prices will move higher before 2017 are becoming less likely as mild temperatures this winter and more efficient wells stymie supply reductions, analysts said last week.
An “inflection point” for prices is going to come, but it may not be until the second half of 2017, Sanford Bernstein analysts said Friday. Analysts Bob Brackett, Andrew Pizzi and Jackson Kulas said U.S. oil production began to fall about six months after rigs fell, but gas still continued to rise, albeit slightly, because of well improvements and more drilled but uncompleted wells.
"We forecast that 2016 will mark another year of gas oversupply as demand is roughly flat with lower El Nino residential/commercial demand offsetting the rise in exports," Brackett and his team said. "This likely means another year at $2.75 as power substitution from coal sets the marginal price."
With 4 Bcf/d of incremental demand expected by mid-2017 -- through exports and a possible return to "normal" temperatures -- Bernstein is anticipating "an inflection as the price driver returns to marginal-cost economics." By the end of 2017, analysts expect prices to rise to $3.25/Mcf, with full-year prices averaging $3.00.
Even if gas-heavy exploration and production companies go on a "starvation diet" in 2016 and are able to reduce production by 32% from 2015 levels, Lower 48 output almost may maintain this year's levels, "slipping a mere 1 Bcf/d from 76.1 to 75.1 Bcf/d."
Offshore gas "grows slightly" as new Gulf of Mexico projects come online, leading to an estimated overall U.S. marketed gas supply in 2016 of 84.1 Bcf/dd, versus 85.1 Bcf/d in 2015.
Bernstein analysts think the "fully loaded gas marginal cost is $4.50/Mcf,” but it generally trades $1/Mcf lower because of the "midstream contract overhang" in the Haynesville/Barnett shales. Their price model sees an average of $2.75/Mcf in 2016, $3.00/Mcf in 2017 and $3.25/Mcf in 2018.
"A major reason we anticipate it stays below $3.50/Mcf is our bullish view on oil, which will begin to ramp associated gas in the medium term," Brackett said. The "biggest downside risk" to the forecast on the demand side is lower liquefied natural gas prices that may deter U.S. exports.
Barclays Capital's Nicholas Potter said El Nino so far is doing what the meteorologists have said it would do, with November above normal temperatures and December now following suit. "Both prompt month and cash natural gas prices lost ground during the first week of December," with the prompt month contract trading at $2.19/MMBtu on Dec. 4 and cash prices at $2.11.
"Not only are these prices low in historical terms, but even more so considering it is now December. In fact, these are some of the lowest December natural gas prices since 1999."
Barclays analysts in November said they saw a 25-30 cent/MMBtu downside risk to their base case 2016 price forecast of $2.84 if the winter were 4% warmer than normal. And as "short-term bearish fundamentals persist, the overall U.S. natural gas resource base continues to grow," Potter said.
The extremely mild weather has led Bank of America Merrill Lynch Global Research analysts to also forecast soft domestic gas prices. They are forecasting prices to average $2.20/MMBtu by the end of this month. By the end of March, prices are seen strengthening by only 10 cents.
"At this point our biggest worry is a mild winter scenario that results in 2.4 Tcf-plus March storage exit," Societe Generale analyst Breanne Dougherty said. "We do expect tightening balances through 2016, however, a large winter 2015/2016 storage overhang will need to be absorbed somehow." SG's Henry Hub forecast for January and February is $2.30/MMBtu and in March it's expected to average $2.15. For 2Q2016, the forecast is $2.45/MMBtu, with 3Q2016 prices at $3.05 and 4Q2016 averaging $3.45.
Dougherty said the Energy Information Administration's recent Drilling Productivity Report "held no surprise" for gas production (see Shale Daily, Dec. 7). "We do not believe the U.S. production base has entered a period of defined decline yet,” she said. SG analysts are holding to their base-case assumption of relatively flat U.S. gas output of 72-73 Bcf/d to the end of 2016.
"We see the end of March 2016 storage position as being a critical 2016 sentiment and price trend checkpoint," she said. If mild weather holds and the market exits March with a storage position above 2 Tcf, the scenario would put "disproportionate pressure" on prices in the spring.
"Under this scenario the transition from a year-on-year storage surplus to deficit may not materialize until the very end of the injection season or even winter 2016/2017. This scenario would support a significant softening of our July through December 2016 price view, supporting a 2016 price average closer to $2.50/MMBtu."
According to an average of all of NGI's Forward Look natural gas pricing points on Friday (Dec. 11), the national price discount to the Henry Hub is expected to get worse before getting better. Prices are expected to average 6.7 cents below the Henry Hub for 2016 and reach a trough at 8 cents below the Hub in 2017, before rebounding (see chart). By 2021, the average of NGI's Forward Lookpoints is expected to break into positive territory, albeit by slightly less than a penny.