Robust demand from the power generation sector has helped to rebalance the natural gas market and fundamentals are in place for prices to increase to "at least $4[/Mcf] this winter," according to Canaccord Genuity analyst John Gerdes.
"Since the start of the injection season, the y/y storage overhang has eroded from [approximately] 900 Bcf to [approximately] 300 Bcf, largely on the back of almost 4 Bcf/d stronger y/y gas-fired power demand," Gerdes said. "In a sub-$3 gas price environment, gas-fired power generation served as the corrective mechanism to reduce the storage surplus...The necessity of low gas prices, and corresponding anomalous strength in gas-fired power demand, is now receding, and we believe gas-fired power demand should wane later this year."
Canaccord recently said it expects gas prices to average $3.50/Mcf for 4Q2012, $4.00 in 2013 and $5.00 for the long term. Along with the expected increase in prices next year, Canaccord said last Monday it expects gas-fired power demand to decline about 1 Bcf/d.
An Energy Information Administration (EIA) official recently said he expects gas demand for electricity generation this winter to be about the same as it was last winter (see NGI, Sept. 17a). The power burn will likely be 2.5-2.6 Tcf, and the amount of coal-fired generation capacity that is used during the winter months will depend on natural gas prices, EIA Deputy Administrator Howard Gruenspecht said. And EIA last week said it expects domestic gas production to be at an all-time high this year and to reset that record for a third consecutive year in 2013 (see NGI, Sept. 17b).
Spooked by "extraordinarily weak gas prices," gas drilling "has overcorrected to the downside," according to Gerdes. "In the wake of extremely weak gas prices, the E&P [exploration and production] industry has cut gas-directed activity to [approximately] 450 rigs, which is markedly below 650-675 gas rigs necessary to maintain long-term market balance," he said. "Specifically, the gas market is currently 1.5-2 Bcf/d under supplied on a weather normalized basis."
Working natural gas inventories are at historically high levels for this time of year. As of Sept. 20, working inventories totaled 3,496 Bcf, according to EIA's Weekly Gas Storage Report, 320 Bcf more than last year's level and 278 Bcf above the five-year average. EIA has said it expects that inventory levels at the end of October will set a new record of 3,950 Bcf.
But by the end of the heating season the drilling overcorrection should leave storage levels about 500 Bcf lower than at the end of the last heating season, and by Nov. 2013 gas in storage could be as low as 3,500 Bcf, about where it was in Nov. 2008, according to Gerdes. "Notably, in the fall of '08, natural gas prices were above $7," he said.
Canaccord said its expectation of the gas rig count averaging about 600 rigs in 2013 "is highly optimistic," and warned that without at least a $4/Mcf price signal and corresponding increase in drilling activity, its Nov. 2013 storage projection "will likely also prove to be overly optimistic." Raymond James & Associates Inc. expects the U.S. gas rig count to slow its descent in 2013 (see related story).
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