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Goldman Raises Natural Gas Price Estimate on Declining Storage

Two energy analysts on Monday revised their forecasts upward for U.S. natural gas prices, with Goldman Sachs now expecting storage levels to end at 1.198 Tcf by the end of March.

Weather forecasts suggest the current winter weather may extend through March, the Goldman team said in a note.

"Accordingly, we lower our end-of-March gas inventory expectations to 1,198 Bcf from 1,388 Bcf previously, largely driven by colder-than-average temperature forecasts for the first half of February," said Goldman's Samantha Dart and colleagues. "In our view, this relatively low number reinforces the need for higher production growth than what we now embed for the year in order for the market to reach comfortable levels of inventories by the end of October."

Goldman raised its 2014 New York Mercantile Exchange (Nymex) forecast to $4.50/MMBtu from $4.25 to "incentivize increased drilling in areas such as Fayetteville and Haynesville shale plays."

 Wells Fargo Securities also raised its expectations "modestly" to $4.09/MMBtu from $3.98. The 2015 estimate today is $4.09/MMBtu, while 2016 and beyond prices should average higher at $4.50.

Dart noted that the sharp inventory draws through the end of winter ultimately would leave the U.S. gas market in deficit as summer approaches.

"Specifically, the latest weather data leads us to lower our end-March storage number to 1,198 Bcf, from 1,388 Bcf previously, with two-thirds of this revision driven by colder-than-average weather forecasts for the first two weeks of February," Dart said. "Taking into account our expected zero price-induced coal-to-gas substitution this summer and our updated year-on-year production growth numbers (2.3 Bcf/d, including the 200 MMcf/d increase in our expected Marcellus production growth discussed previously), this would leave end-of-October inventory levels at 3,625 Bcf."

Several energy analysts told NGI in late January that added to the polar vortexes, unexpectedly cold, and sustained, winter weather could lead to storage levels around 1.2 Tcf by the start of April, possibly keeping gas prices higher through the year (see Daily GPI, Jan. 24).

A relatively low storage number would "pull summer 2014 prices higher from current levels to curb demand and incentivize additional supply to help end of October 2014 inventories reach more comfortable levels," said the Goldman analysts.

On the demand side, they said gas prices need to remain above Appalachian coal, now pricing at $4.60/MMBtu, with no price-induced coal to gas substitution this summer. On the supply side, Goldman's team sees a need to incentivize a "small" increase in production beyond the growth already expected.

"Specifically, we believe 300 MMcf/d of additional supply, which could even be a combination of higher production and pipeline imports from Canada, this summer would suffice to restore end-October inventories to more comfortable levels, at 3,684 Bcf." Summer 2014 contracts have remained closer to $4.30/MMBtu and "will likely need to price higher to provide that incentive to producers...

"Also supporting this view of a higher supply requirement this summer is the March 2015-April 2015 contract spread, which has remained very wide relative to March-April spreads in subsequent years, suggesting the market is still concerned about having enough supplies next winter."

The lack of widespread deliverability issues outside the bottlenecked Northeast in the face of the extreme cold "reinforces our belief that the U.S. gas storage and delivery system has passed a major test." Goldman kept its 2015 Nymex price forecast at $4.00/MMBtu because analysts think the market likely will return to an oversupply balance by then.

Northeastern producer basis likely will remain under pressure, said the Goldman team. The takeaway capacity constraints that drove Northeast basis to minus 60 cents/MMBtu in late 2013 should remain in place. The increasing production from the Marcellus and Utica shales "easily" should fill additional takeaway capacity scheduled to be online over the next 18 months, "especially as the sharp widening of the basis did not leave local price levels for producers below marginal cost of production."

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