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Raymond James More Bullish on '14 NatGas Prices

With the over-the-top winter playing havoc on natural gas prices and storage, higher prices are needed to encourage more drilling and induce utilities to switch to coal for inventories to refill adequately, analysts said Monday.

J. Marshall Adkins & James M. Rollyson of Raymond James & Co. Inc. said they recognized the need to adjust the price deck upward to refill inventories "to a reasonable level." Two months ago they raised the gas price forecast to $4.25 (see Daily GPI, Jan. 6). However, prices this year need to average $4.75 to ensure incremental production and encourage power companies to switch from gas to coal-fired generation.

"At this price, we feel both producers and utilities can be happy..." said the duo. "Based on current 2014 strip prices of $4.40, it appears for once that we may actually be more bullish than consensus.

"As far as our 2015 price forecast goes, we are leaving our current estimate of $3.75 intact at this time. We see robust supply growth continuing to outpace improving demand through 2015, absent a repeat winter next year. Longer-term, we remain convinced that both U.S. gas demand and U.S. gas supply can grow profitably at a $4.25 gas price."

With more cold weather still to come, some weather forecasters have said this may be the coldest opening to the spring season in more than 50 years, noted Adkins and Rollyson.

Weather alone accounted for 5 Bcf/d-plus of increased domestic demand this winter, they said. To offset the surge in weather-related demand, although modest, there's been a continued increase in gas supply and gas losing share to coal.

"We estimate gas production grew 2 Bcf/d over the winter, despite significant well freeze-offs, which have been particularly problematic in the Northeast. Additionally, we believe price-induced coal switching led to an additional 2.1 Bcf/d of incremental gas supply. Bottom line, despite record U.S. production, the market was 2.3 Bcf/d tighter than the previous year, which has led to record spot prices and the 1Q2014 average gas price coming in well ahead of our forecast."

Equilibrium would be reached at a price of $4.75/Mcf, they said. "We believe the largest factor to loosening the market during the summer will be further supply growth, which we estimate to average 3 Bcf/d-plus over the course of the next 31 weeks.

"Additionally, the ultimate swing factor -- gas-to-coal switching -- could significantly alter the equation." At $4.75, gas prices should encourage utilities to burn more coal instead of gas for power generation but not too high to put pressure on gas prices.

"At our new forecast, we think the gas market will go from a low of 2.6 Bcf/day tighter year/year (y/y) in December to a peak of 4 Bcf/day looser y/y this summer and reach reasonable levels of gas in storage at season end." In the Northeast, however, the analysts expect prices to remain at a discount to the benchmark price because of continued pipeline constraints.

It may take more than record injections to refill storage, as well as lower power generation demand as utilities switch to coal.

"Based on our new price forecast of $4.75, we expect gas-to-coal switching can add 2.2 Bcf/d of additional gas supply over the injection season. For reference, this is in addition to the 2.3 Bcf/d of demand that coal gained in 2013. In total, we believe switching will translate to over 470 Bcf of additional injections over the summer season."

Keep an eye also on industrial demand growth, reduced nuclear/hydro generation and higher net gas exports, said Adkins and Jollyson. Industrial consumption is inching up but "meaningful" growth isn't likely until 2015-2016 as petrochemical and fertilizer projects begin operating.

In a separate note to clients Monday, Stephen Smith Energy Associates Inc.'s analysts said their pricing outlook for 2Q2014 is higher than the corresponding strip but generally should move closer for the balance of the year.

"Our projected peak fall storage is 3,463 Bcf, a deficit of 171 Bcf to the fall peak norm (based on 2006-2010)," analysts said. "This assumes normal weather for 2Q2014, 3%-above-normal cooling degree days for 3Q2014, and 3Q2014 below-normal heating degree days for 4Q2013. We also assume about 3% y/y production growth for April through October 2014 and lower-than-last-year shares for gas-to-'gas-plus-coal' power generation."

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