"In less than six weeks, the industry will enter the summer injection season with significantly less working gas in storage than originally anticipated," a Credit Suisse analyst said recently, noting that this will serve to put a floor under gas prices.
Bruising cold weather has served to draw down storage inventories further than many expected, and working gas storage levels will likely slip below the five-year average, said Credit Suisse's Teri Viswanath. Increased gas buying by utilities to refill storage this summer "will likely set a floor for natural gas prices," she said. While last year saw gas prices crater below $2/MMBtu after injection season, prices this year should get support to remain above $4.50/MMBtu, she said.
Viswanath noted that the firm has tweaked its 2010 gas price forecast downward to $5.08/MMBtu from $5.15 to reflect a "significant correction in prices in the front of the curve, where we maintain a neutral investment bias...
"Further, given the change in storage, we recommend that investors consider exiting the trade recommendation we issued last month (short July-December 2010 strip at close or about $6.08). Given the significant downward correction in the strip over the past month, we believe that this is an optimal point to close out this position."
On the demand side, Viswanath gives a nod to her fellow analysts and the wide difference of opinion that exists related to the outlook for industrial gas demand. She noted a more than 1.25 Bcf/d range in 2010 forecast estimates among analysts, ranging from a year-over-year increase of just 0.25 Bcf/d to a robust 1.5 Bcf/d increase, which she noted would restore demand to pre-recession levels.
Viswanath said historical references on industrial demand are no longer very useful for forming predictions as the last decade has seen changes in the gas intensity of industrial production.
"Looking ahead into this year we believe that the combination of inventory restocking and a pick-up in real end-use demand will result in higher industrial natural gas consumption," Viswanath said. "However, we are cautious about the level of recovery for this segment because of lingering weakness in significant core end markets."
While utilization levels in the U.S. steel industry, for instance, have improved since last year, Viswanath said full recovery in the industry this year will likely be impeded due to weakness in the construction sector.
"In nearly every major gas-intensive industry we follow the story is the same...there are signs of improvement that fall short of complete recovery," she said.
"Therefore, while we believe that storage refill requirements will likely set the floor for natural gas prices this summer, we are not yet convinced that unexpected industrial demand will set the ceiling."
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