The warmest winter on record in the United States collapsed natural gas prices to the lowest levels since 1999, but by July prices could begin to rise, if "normal" weather prevails and production continues to slide, BofA Merrill Lynch Global Research said Thursday.
The analyst team reduced its 2016 gas price forecast by 30 cents to an average of $2.30/MMBtu, but under "normal" weather, prices could bounce to $3.10 by the end of the year. Last October the BofAML analysts had forecast 2016 prices would average $3.00 (see Daily GPI, Oct. 26, 2015). The Energy Information Administration last month forecast 2016 gas prices would average $2.25, rising to $3.02 in 2017 (see Daily GPI, March 8).
"Inventory levels now sit at 2.5 Tcf, the highest seasonal level ever and 0.5 Tcf above our initial January projection," analysts said. "Other than weather, economic natural gas demand drivers have been rather absent in recent quarters, exacerbating the glut."
Residential/commercial gas consumption has been contracting for some time, and the power generation sector "has had to weigh in and absorb the incremental gas volumes at lower prices. Even then, coal-to-gas switching will be of limited help going forward, as most U.S. regions that could switch out of coal on economic terms have already done so."
Meanwhile, exports through pipelines to Mexico and via liquefied shipments overseas should continue to grow, helping to rebalance the Henry Hub market, according to analysts. The base case is projecting end-of-October storage levels at 3.9 Tcf, with pricing recovering by December -- if the weather cooperates.
"Overall, we see a proper rebalancing of the U.S. natural gas market at the beginning of the 2016/17 winter and expect prices to bounce back to $3.10/MMBtu by the end of the year. We also see an inventory drawdown of roughly 2.2 Tcf next winter. As such, we would expect end of winter stocks to stand at 1.7 Tcf next year, a deficit versus the five-year average."
Many weather forecasters, including the National Oceanic and Atmospheric Administration, are predicting a 40% chance of a La Nina event developing by September, rising to 40% by the fourth quarter (seeDaily GPI, March 2). The El Nino event that led to record North American winter temperatures has made way for the transition to La Nina, which usually results in hotter-than-normal summer temperatures.
"A very strong La Nina effect would result in a hotter than normal summer and may push New York Mercantile Exchange natural gas to $2.75/MMBtu by July, but La Nina would also act as a dampener on winter prices and may prevent a price recovery in 2017," analysts said.
In their review of heating degree days (HDD), analysts said the United States recently hit a low 12 HDDs, a figure more typical of late April than early March. This past winter "turned out to be 2.8 standard deviations warmer than the historical average, while the 2011/12 winter was 2.7 standard deviations above the average..."
Naturally, gas prices have declined, producers have curtailed capital expenditures (capex) and output, although their responses have varied by basin. Gas production responses to Henry Hub prices within six months in most U.S. basins, according to BofAML. Not all basins are equally sensitive because of infrastructure constraints and associated gas output. Production tends to be driven mostly by pipeline growth, which is not as sensitive to Henry, but in any case supply has begun to roll over.
"True, some production declines have come on the back of flooding, force majeure, and maintenance," but the low price environment "will probably delay a fast comeback, as extended maintenance has played a key role in declines," analysts said.
Midcontinent producers on average have reduced 2016 gas production forecasts by about 10% from 2015 levels, and even the Northeast producers aren't thriving. Overall U.S. production "is declining sequentially until 4Q2016 as associated shale gas production and conventional gas production declines outside the Northeast (NE) more than offset growth in the NE."
Analysts expect to see associated gas production from oil wells bottom out toward the end of 2016, while NE output ramps up with new pipelines coming online. U.S. production should begin to rise again toward the end of the year, albeit slowly.
Also factoring into the picture is Canadian gas output, which has fallen as AECO prices plummeted to 18-year lows, analysts said. After tracking 2012 levels for most of this past winter, the early arrival of spring means that Canadian inventory levels may be sitting at around 510 Bcf, the highest level at the end of March ever for this time of year.