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Credit Suisse: Several Factors to Keep Lid on Summer Gas Prices

A confluence of factors is setting this summer up to be a soft one for natural gas prices, according to analysts at Credit Suisse.

"...[O]ur early assessment of the key drivers of supply-demand balances suggests there will be limited opportunities for natural gas prices to rally" this summer, Credit Suisse analysts said in a note Monday.

Their outlook is shaped by the outlook for "relatively stable supplies" along with more normalized weather and abundant supplies of hydropower in the Northwest. Additionally, comparatively few nuclear outages are expected for refueling, and about 1.5-2 Bcf/d of incremental coal-to-gas fuel switching is called for among power generators.

On the gas supply front, domestic production continues to set records despite low prices, which should make for continued low prices in the near term, the analysts said.

"...[R]ecent pipeline receipts indicate that U.S. natural gas production is nearly 4 Bcf, or 7%, above year-ago levels at the current rate of 63.5 Bcf/d," the analysts said. "Even brief losses of 5 Bcf/d due to widespread freezeoffs in early February were quickly recovered..."

However, a falling rig count and further turn toward liquids-rich plays by producers could moderate the oversupply later in the year, they said. "Despite the risk of late-year declines, overall production in 2011 is still expected to grow by nearly 1 Bcf/d versus 2010 levels, leaving the market oversupplied for the near term," they said.

This summer is expected to be "less sweltering" than last year, and "the official long-lead forecast suggests that the extreme summer heat will likely settle in the far western states, which could signal slightly reduced cooling loads," Credit Suisse said.

La Nina is credited for a wetter-than-normal fall and winter, making for plenty of hydropower supplies in the Northwest, the analysts said. "This year promises to be a very strong water year," they said, "which should translate into a significant year-on-year increase in hydropower at the expense of gas demand for the region. By our estimates, high water years marked by excessive snowpack can displace about 0.5-1.5 Bcf/d of natural gas demand for power generation from January to July compared to average precipitation years."

More nuclear power will be available this year than last as the analysts said they expect to see an increase of 2,000 MW of capacity online this year during the peak refueling period of mid-April. This is expected to result in a roughly 0.4 Bcf/d loss in natural gas demand.

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