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Fitch Sees Natural Gas Range-Bound Between $3.00-4.50

Two weeks after raising its U.S. natural gas price deck due to slightly better fundamentals, analysts with Fitch Ratings on Wednesday made the bold statement that they expect natural gas prices to be rangebound over the "next few years."

In a short research note on the company's Fitch Wire credit market commentary page, the analysts said they expect natural gas prices to stay in a range between $3.00-4.50/Mcf at least through 2014.

"We expect prices will remain volatile due to weather impacts but should continue to be range bound over the next several years due to the substantial amount of oversupply that continues to affect the market and limited visibility on new demand to soak up that supply."

Fitch said it thinks power demand from coal/gas switching will provide a floor near $3.00 and producer response will provide a ceiling near $4.50. "For 2014, we are modeling Henry Hub to average $4.00/Mcf in our base case and a long-term base case price of $4.50/Mcf," analysts said.

The credit ratings firm pointed out that inventories are back inline with pre-2012 historical averages, but production is still at an all-time high and prices remain under pressure below $4.00. Even though the rig count in dry gas basins remains low, increasing associated gas production from liquids-rich fields in North America has more than offset the reduction and ethane rejection should continue to have a negative impact on prices, Fitch said.

"We expect some near-term incremental demand response, but major demand additions from coal and nuclear power plant retirements, LNG [liquefied natural gas] export, and new chemical plants are not due to be completed until 2016-2018," the company added.

Late last month Fitch analysts slightly raised their domestic gas base-case price deck for Henry Hub to $3.75/Mcf in 2013, while maintaining its long-term gas prices at $4.50/Mcf. "The uptick reflects a moderate improvement in prompt natural gas market conditions, created by the combination of increased demand (primarily residential and commercial), and a plateauing of gas production," the analysts said at the time.

Seperately, analysts at Credit Suisse last week said the elephant named Marcellus that has been sitting on Northeast-Henry Hub basis isn't about to move along, and what used to be a premium market will see trades discounted to the U.S. gas benchmark for a while.

"...[T]he once Northeast premium market has all but dissipated today," thanks to abundant supplies of gas from the Marcellus Shale, not to mention the Utica Shale, which has yet to come into its own. The analysts said average basis from the major Northeast trading hubs has fallen 35 cents year over year from an 11-cent premium to Henry Hub last August to a 24-cent discount currently.

Ample supplies of natural gas from the Marcellus and Utica shale plays has flattened basis, forcing companies out of the gas marketing business due to the lack of spreads. At least one gas trader wondered aloud to NGI what his next line of work might be.

In June Oneok shut down its natural gas marketing business in a nod to the reality of flattened basis spreads and the more challenging gas trading environment. JPMorgan Chase & Co. and Hess Corp. have also recently announced their exits from gas marketing for varying reasons.

"Following the completion of the first of many processing plants in June, daily basis differentials at the Dominion South hub fell negative to lows of 60 cents/Mcf," Credit Suisse said. "Based on our regional supply and demand work, we expect wider Northeast disparities may continue indefinitely in Appalachian gas markets, with longer-term differentials poised to be 25 cents/Mcf to 50 cents/Mcf below Nymex (versus the long-term premium of 20 cents/Mcf)."

Thanks to the Northeast shale plays, the region is nearly 100% self-sufficient during the summer and requires "significantly less" gas from the South, Midcontinent and Canada to meet heating demand during peak winter months. As New England markets become increasingly connected to Marcellus and Utica supply, they could be the next to see a basis collapse.

Oversupply in the Northeast and wet gas production from northwestern Pennsylvania that doesn't conform to pipeline specifications have made for "heavy discounts" at pricing points Dominion South as well as on nearby Columbia Gas Transmission, the analysts said. "Given the number of pipeline projects adding import capacity to the New Jersey-New York markets over the next six to 12 months, TETCO M3, Transco Z6 (non-NY) and Transco Z6 NY may be next to see sustained pricing discounts to Henry Hub," Credit Suisse said.

According to NGI's Bidweek Survey, while the Aug. 2013 bidweek average spot price at Henry Hub was $3.45, Dominion, which represents southwestern Pennsylvania and West Virginia, was trading at $2.94. Representing northeastern Pennsylvania, Tennessee Zone 4 (Marcellus) was trading at $1.97, while Transco Leidy Line was at $2.03.

More than half of the natural gas pipeline projects that entered service last year were in the Northeast, according to the Energy Information Administration. The two largest projects added to the Northeast in 2012 -- Dominion Transmission Inc.'s Appalachian Gateway Project and Equitrans LP's Sunrise Project -- both move natural gas from Marcellus production fields to northeastern markets.

Genscape Inc. senior natural gas analyst Andy Krebs recently told NGI's Shale Daily that pipeline capacity out of the Appalachian region is desperately needed as simply dialing back production from other regions is no longer sufficient.

To redirect gas bound for the bargain Northeast along traditional routes from the Gulf Coast, Midcontinent and Rocky Mountains, pipelines have announced a number of physical backhaul projects. "We think this indicates a desire by producers to find a permanent solution to what is likely to be acute oversupply in the Northeast gas market," Credit Suisse said.

Among the projects are Texas Eastern Transmission's Gulf Markets Expansion, Tennessee Gas Pipeline's Southwest Louisiana Supply project, and Kinder Morgan's Elba Express Pipeline.

The analysts said Columbia Gas Transmission has been backhauling gas from Kentucky to Louisiana to serve the Gulf Coast region, and Rockies Express Pipeline (REX) recently announced a backhaul agreement with an unnamed Utica producer. Longer term, REX has said it plans to become a bidirectional pipeline.

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