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Warm Weather, Shale Production Holding Down 2012 Price Forecasts

Unusually warm winter weather and the ongoing production boom from the nation's shale plays will help keep natural gas spot prices down in 2012, the Energy Information Administration (EIA) and analysts at Bank of America Merrill Lynch (BofA) said in separate reports Monday.

Henry Hub spot prices will average $3.53/MMBtu in 2012, a decline of almost 50 cents/MMBtu from the 2011 average spot price, according to the EIA's latest Short-Term Energy Outlook. The forecast average Henry Hub spot price for the year is 17 cents/MMBtu lower than EIA said it expected in its previous outlook and 60 cents/MMBtu lower than it was calling for in November. The latest EIA forecast is nearly $1.00/MMBtu below the agency's January 2011 projection for 2012.

BofA analysts cut their 2012 gas price forecast by a dollar to $3.30/MMBtu from $4.30/MMBtu, citing "abnormally low" winter heating demand piling on top of booming gas production and stuffed storage.

"We only see a very small recovery in prices in 2013 and expect prices to average $3.80/MMBtu, relative to our previous expectation of $4.70/MMBtu," the BofA analysts said. EIA said it expects that Henry Hub spot prices to average $4.14/MMBtu in 2013.

Goldman Sachs analysts earlier cut their 2012 forecast to $3.10/MMBtu, and RBC Capital Markets cut its forecast by 16% to $4.00/MMBtu. Analysts at Calgary-based Arc Financial Corp. -- in a Monday note that said U.S. gas production is running about 6 Bcf/d above year-ago levels -- also blamed warm weather for weakening prices but said hopefully, "...[I]t's premature to conclude that the year is completely shot."

The "plenty of gas from shales" story is familiar to all by now; warm weather is a comparatively new producer antagonist.

Tallying heating degree days (HDD), BofA said November and December saw 200 fewer HDDs than the norm, a 17% reduction. "Thus it is no surprise that residential and commercial gas consumption, which is particularly sensitive to weather, dropped 17% YoY [year over year] over the same period," they wrote. "Overall, we estimate that the unusually warm winter weather in those two months deducted 1.64 Bcf/d of demand growth in 2011 relative to a normal winter."

Thanks to the warmer temperatures, pulls on natural gas storage have been lighter than usual. The storage surplus to five-year averages "has grown incessantly since mid-September" as a consequence, the analysts said. "We estimate that even if winter weather turned substantially and was to match last year's significantly colder-than-average weather for the remainder of January, February and March, we would not create enough demand to reduce the storage overhang."

EIA last week reported a weather-driven withdrawal for the week ended Dec. 30 of just 76 Bcf. As of Dec. 30, working gas in storage stood at 3,472 Bcf, according to EIA estimates. Stocks are now 356 Bcf higher than last year at this time and 458 Bcf above the five-year average of 3,014 Bcf. And the agency thinks storage levels will continue to set records for some time -- 3,960 Bcf at the end of October 2012 and 3,990 Bcf at the end of October 2013.

Natural gas consumption growth will continue into 2013, with projected total consumption averaging 69.1 Bcf/d, according to the EIA outlook.

On the production front, declines in the Woodford, Fayetteville and Barnett shales will be made up for by "the rampant Marcellus Shale," the BofA analysts said. "The Utica Shale play in Ohio is likely to be a significant contributor to production growth in the years to come," they wrote. "Meanwhile, producers in the Haynesville play, which has been the main driver of U.S. production growth in recent years, are now focusing on improving decline rates and ultimate recoveries rather than initial production rates as the play is also starting to mature."

Increased production from shale plays was a key factor in a 7.4% (4.5 Bcf/d) increase in total marketed production in 2011, the largest year-over-year volumetric increase in history, according to the EIA outlook. EIA expects production to grow by 2.2% to 67.34 Bcf/d in 2012 and 1.0% to 68.04 Bcf/d in 2013 as low prices reduce new drilling plans and consumption grows at a measured pace. "In the face of continued low spot and future prices as well as record high storage levels for this time of year, drillers appear to have begun cutting back on new production plans for 2012," EIA said.

Natural gas production should average 65.9 Bcf/d in 2011, the EIA said, which if realized would be 6.6% (4.1 Bcf/d) higher than in 2010. All of the growth came from higher onshore production in the Lower 48, and it more than made up for the 20% (1.2 Bcf/d) year-over-year decline in GOM production. The EIA said it believes that total marketed production will continue to grow next year, but at a slower pace, increasing 2.8% (1.8 Bcf/d).

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