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NatGas Prices to See 'Short Window of Opportunity' Before Oversupply Returns, Says Bernstein

Natural gas prices touched $3.00/Mcf in September and the forward curve is averaging $3.12 in 2017, but domestic prices could be skewed to the downside over the longer term, according to Sanford C. Bernstein & Co.

Analysts led by Jean Ann Salisbury and Bob Brackett said they are advising caution about gas prices over the longer term, which could be rangebound at $3.00/Mcf as new pipeline capacity moves into Appalachia next year.

Bernstein has revised its gas price deck for 2016 to $2.50/Mcf and for 2017 it's now set at $3.50. However, beyond next year, it's forecast move back toward $3.00 as supply increases to meet new demand.

The ample resources of the Marcellus Shale, which Bernstein envisions may grow to 10 Bcf/d-plus through 2020, and the effect of sunk costs on producer behavior in the "second-tier" gas shales that include the Haynesville and Fayetteville, have shut the door to Henry Hub rising above $3.00 until current infrastructure is maxed out.

"This oversupply thesis is predicated upon capital spend in gas-producing regions," analysts said. "Today, however, we have not seen activity ramp up to match the rise in gas price." Bernstein's gas power index suggests that the current location-specific rig count "is half that needed to maintain flat production over a 12-month period."

Even after factoring in a significant number of drilled but uncompleted (DUC) wells and the curtailed production that awaits pipeline startups in the Marcellus, gas production is going to decline in 2017, according to Bernstein.

"We therefore believe that 2017 may offer a short-lived window of opportunity for gas investors," Salisbury and Brackett said in a note on Wednesday.

Even with a sharp drawdown in DUCs, and assuming 1 Bcf/d of curtailed production coming back into the market, "2017 will see a weak injection season -- unless rigs return to work in the coming months -- before supply growth returns in 2018."

Bernstein outlined a line of sight for "considerable new gas demand in 2017 from several major project/events, with total demand impact of 3.1 Bcf/d:

  • Comanche Trail Pipeline LLC's project to export up to 1 Bcf/d to Mexico beginning in early 2017 (see Daily GPIMay 20);
  • Cheniere Energy Partners LP's Sabine Pass Train 3 liquefied natural gas export startup carrying 650 MMcf/d in 1Q2017 (see Daily GPISept. 16);
  • 270,000 b/d of new ethane demand reduces rejection, estimated at 800 MMcf/d in 3Q2017; and
  • Cheniere's Sabine Pass Train 4 startup for 650 MMcf/d in late 2017.

Bernstein's analyst team noted that gas storage has been above the five-year average this year and it's unlikely to move sharply in the opposite direction next year.

"With supply falling while new export projects increase gas demand, storage will drain, falling well below the five-year average by mid-year," analysts said. "This will cause prices to spike, possibly above $4.00/Mcf."

The exploration and production companies have remained on the sidelines, despite a slight price recovery, as they await an estimated 7 Bcf/d of Marcellus takeaway capacity that's expected to arrive in late 2017.

"We expect the rig count will surge mid-2017 as operators prepare to fill new pipelines," said the Bernstein team. "This will put the lid back on gas price and ensure the rally comes to an end -- but if we don't see a significant rise in rig count by mid-2Q2017, the price rise may be more sustained."

On the oil side, prices are unlikely to strengthen much, with or without a curb by the Organization of the Petroleum Exporting Countries (OPEC), according to Goldman Sachs.

Goldman slashed its 4Q106 West Texas Intermediate (WTI) crude outlook by $7.00/bbl, as surpluses mount in the Lower 48 states and beyond -- while demand remains unchanged. Analyst Damien Courvalin and his team reduced the price forecast for 4Q2016 by $2.00 to $43.00-50.00. The 2017 average price forecast is unchanged at $52/bbl -- but oversupply is expected to be a factor through next year.

"The improvement in oil fundamentals has stalled in 3Q2016," Courvalin said. The "inventory build is set to resume in 4Q2016, a weaker outlook than we had previously expected."

Global oil output now is seen increasing this year by 1.4 million b/d from 2015 levels, which "leaves us now forecasting that inventories will build in 4Q2016 by 400,000 b/d versus our prior expectation for a 300,000 b/d draw during the quarter," Goldman analysts said. "Given our unchanged 2017 outlook, we expect this weakness to be reflected in weaker front month to five-year forward time spreads."

Lower 48 oil production should decline during the final three months of this year in part on lower prices and because of larger 2Q2016 declines than previously expected. The decline, however, should be partly offset by a higher U.S. natural gas liquids forecast, although Goldman's forecast is still below U.S. Energy Information Administration (EIA) projections.

The EIA earlier this month said U.S. onshore oil production would increase in only one U.S. onshore area between September and October -- the Permian Basin (see Shale DailySept. 12).

Data reviewed by Goldman suggested that the sharp production declines observed in 2Q2016 began to slow in 3Q2016 in the U.S. onshore, Mexico and Venezuela, while Brazil and Norway output rebounded from maintenance.

Low cost oil supply, i.e. unconventional production, as well as "disrupted" output in hot spots around the globe is going to determine the path of an eventual price recovery, but Goldman's forecasts are conservative for both.

Members of OPEC, meeting in Algiers this week to discuss a possible cutback in production, could prove fruitful, Courvalin said. However, "it is worth pointing out that Iran, Iraq and Venezuela have each guided over the past month to a 250,000 b/d rise in production next year."

A potential OPEC agreement "could support prices in the short term," but "we find that the potential for less disruptions and still relatively high net long speculative positioning leave risks skewed to the downside into year-end."

The updated 2017 supply-demand balance mostly is unchanged, with a projected average global surplus of 100,000 b/d. Goldman's demand growth outlook is slightly higher at 1.31 million b/d, driven by Asia and North America. The demand outlook is consistent with global gross domestic product growth remaining at 3%, normal weather conditions and a gradual rise in oil prices to $55/bbl by the end of 2017.

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