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U.S. NatGas Security Flips Perspective on Prices, Volatility, Says BNP

U.S. winter weather is playing a much bigger role in natural gas balances today because it is driving the call on marginal production and hence, price changes, the senior natural gas strategist for BNP Paribas said Friday.

Domestic gas supply uncertainty basically is off the table, Teri Viswanath said during a conference call to discuss the firm's winter forecast. Because supplies continue to rise, it will take "extreme weather conditions" to push prices out of their rangebound doldrums. Earlier this week BNP said gas prices would have a $4.00/MMBtu ceiling through winter (see Daily GPI, Nov. 11).

"I think the market has finally internalized what it means to actually have a secure source of supply," Viswanath said. "This changed perspective, assuming that we actually have enough U.S. gas supply, will be relatively important in price formation.

"If we take supply concerns off the table, what we're left with is a low priced, low volatile environment, one in which prices will only break out of a tight range based on significant fluctuations in demand, the right coverage we'll not see without help from the weather."

The "new normal" for gas supply security elevates the importance of peaking winter demand in setting the trend for gas prices, with mild November weather creating headwinds for recovery this season, said the analyst.

This is "kind of the price environment we've experienced over the last five months...On the winter season ahead, in the absence of very cold, persistent cold weather, I see the strong likelihood that we'll see the industry exit the season again with inventory."

Ending the season with gas still in storage has "an important and profound impact on setting the general trend in the first half of the year for prices...

"But not to worry," she added. "The prospect of a surplus has been factored into the curve already and will ultimately take prices low enough to encourage incremental demand; in fact, enough price induced demand that a normal winter ahead should enable the industry to restore sizable inventory deficit by next October."

BNP staff meteorologist Anneliese Alexander, who shared a microphone with Viswanath, doesn't expect low winter temperatures to surpass those of last winter. Overall, the 2013-2014 season may end in average lower temperatures, but they likely will be volatile, with two weeks of cold temps followed by two weeks that are warmer.

"We're going to see a variable pattern here, a lot of ups and downs, not locking into one sustained winter-long pattern," said Alexander.

December overall should be colder than it was a year ago. January and February, however, "are toss ups compared to the prior year." Alexander sees "big flips in the pattern," going from very warm temperatures for a couple of weeks followed by cold temps for a couple of weeks, and back again.

There are no El Nino or La Nina weather systems as in years' past, nor other factors that would sustain cold weather, Alexander said.

The near-term fundamentals for gas markets based on the winter forecasts are weak, said Viswanath, but "winter delivery appears currently undersold. Long futures and option fence strategies on the January '14 Henry Hub futures contract have become attractive positions to hold."

The U.S. Energy Information Administration's recent Short-Term Energy Outlook called for winter temperatures to be about in line with the 10-year average, Viswanath noted (see Daily GPI, Nov. 13).

"Based on this prognosis, we see higher heating demand at the start of winter giving way to losses toward the end of the season, netting a year/year (y/y) decline for this segment. Further exacerbating this winter imbalance is our expectation of domestic production growth. In our opinion, these two factors will convert the current inventory deficit to a surplus by the end of winter.

"Based on our reference case, which reflects a 1.58 Bcf/d y/y slackening in the balances, we see working gas in storage falling to just 1.86 Tcf by the end of March."

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