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Storage Inventory Ending at 800 Bcf 'Not Outlandish,' Says Credit Suisse Analyst

Credit Suisse has raised its average U.S. natural gas benchmark price forecast for 2014 by 13% to average $4.30/MMBtu because of record storage withdrawals, which by the end of March are expected to be 1.1 Tcf. Prices in 1Q2014 are seen averaging $4.80, a 50-cent hike from a prediction at the end of 2013.

Jan Stuart, who heads energy commodity research, led a team of analysts in a discussion of the updated forecasts on Thursday.

"The recent string of cold weather this winter has left U.S. natural gas storage inventories near critical levels," with 2014 prices at three-year highs and above targets. "We think there is staying power in higher natural gas prices this year, particularly during this summer." They are forecasting that average prices will dip to $4.25 in the second quarter and to $4.35 in the third. The final three months of 2014 now are expected to see prices averaging $3.75.

An abnormally hot summer also could push prices high enough to necessitate significant gas-to-coal substitution "at levels we have not seen in years," they said.

The forecast for higher gas prices and more gas-to-coal switching align with other recent forecasts by energy analysts (see Daily GPI, Feb. 5; Feb. 3; Jan. 24). Like other analysts, Credit Suisse is using 1.1 Bcf/d of storage in the ground, but analysts said a 0.8 Bcf/d year/year loss in gas power demand should allow the market to fill back to a target of 3.8 Tcf by the start of November's storage season.

"However, to get there, gas prices would need to rise in order to incentivize the switch back to coal. Southeastern coal plants plan to benefit most this summer as other lower-cost coal plants are arguably in the money."

If by the end of March storage stands at 1.27 Tcf, a hot summer may require prices to average $4.30/MMBtu to induce producers to increase output, with "normal" temperatures sending prices to around $3.80 and mild temperatures to $3.50, according to Credit Suisse.

At a 1.1 Tcf storage level at the end of March, which many now are forecasting, a hot summer might dictate average prices of $5.10, while normal temperatures could see prices averaging $4.30, while a mild summer would put prices at around $4.00.

If working storage levels were to plunge to 800 Bcf by the end of March, which Stuart said was "not outlandish," a hot summer could lift prices above $5.20, with normal summer weather setting a floor of around $5.10 and mild temperatures putting average prices at $4.30.

Total winter demand is less price elastic than in the summer, and it's even less elastic when inventories are depleted. So the $4.80 price forecast for the first quarter may be low.

"We think prices can be sustained above $5.00/MMBtu given winter demand is driven more by residential/commercial loads than the power sector," said the analysts. The risks to price "blowouts" most likely would be in the Midwest, where inventories are at nine-year lows, utilizing just 40% of available capacity. Marking to market for January and February now is averaging 50 cents above initial forecasts of $4.80/MMBtu, they added.

Summer 2014 prices now need to average $4.30/MMBtu to balance storage, predicted the duo. However, if there's a hot summer, $5.00/MMBtu may set the floor.

The higher price signals aren't a call for the "beginning of the end for the shale revolution," said analysts. "Indeed, the real trading opportunity opening up, we think, is that the market has set itself up as if it is again underestimating the production potential of the U.S. shale basins..." Once the weather-driven stress in the system is over, likely by the end of September, pipe and processing completions should unlock even more supplies from the Appalachian Basin.

Gas supplies remain strong and should be stronger through the end of this year, but infrastructure buildout remains the key. "We have long held a more bearish-than-consensus view for 4Q2014 U.S. gas prices" because of already announced infrastructure buildout in the Northeast.

"At the core of our base case view is the new 2.0 Bcf/d of gas pipeline capacity that is slated to come onstream during 4Q2014. This should unlock another wave of northeastern gas supplies, similar to those that hit the market in late 2012 and again late last year. And while the focus in previous years was on increasing intra-Northeast connectivity with Marcellus gas, the 2014 vintage expansions begin to target the Midcontinent and southern U.S. gas markets."

Recent gas price rallies give an edge to producers that may want to put gas rigs back to work. "In fact, after remaining flat for the last 12 months, Haynesville horizontal rigs have quietly risen by seven rigs year/year," the analysts noted. Coincidentally, Chesapeake Energy Corp. on Thursday said it would be running seven to nine rigs in the big gas play through 2014; it was running six rigs at the end of 2013.

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