Raymond James & Associates Inc. on Tuesday increased its long-term U.S. natural gas price deck by 25 cents to $4.50/Mcf on concerns that the market is underestimating how difficult it will be to refill storage this year.
Following the tough winter, producers will have a long slog in restocking gas storage tanks, which should result in higher gas prices later this summer, said J. Marshall Adkins and James Rollyson.
"Our 2014 U.S. gas model currently suggests summer ending storage of 3.4 Tcf, or nearly 500 Bcf below 'full' storage. We believe that U.S. natural gas prices will need to average $4.75/Mcf for the rest of the year to encourage enough gas-to-coal switching just to reach our below-normal storage target."
New York Mercantile Exchange futures prices for 2014 are averaging $4.57/Mcf; the Bloomberg consensus is $4.58.
Even if the 10-year average weather forecast were to return by next fall, 2015 gas prices still would need to average closer to $4.25, about 50 cents higher than a previous estimate, to refill summer gas storage in 2015, they wrote.
The higher price model assumes robust output continuing from the Marcellus/Utica shale region -- unrestricted by pipeline bottlenecks -- and minimal gas price differentials between basins, with a "seamless way" for utilities to switch from gas to coal for generation.
"That means there is potential for even lower storage numbers than we are modeling," said Adkins and Rollyson. Improving visibility on higher industrial, liquefied natural gas (LNG) and petrochemical demand growth after 2015 encouraged the duo to increase their long-term gas price deck by 25 cents.
Winter weather accounted for more than 5 Bcf/d of increased domestic gas demand this past winter. Since then, gas prices have been hovering in the $4.50 range on moderating forecasts and some larger shoulder season injections. U.S. gas output is on track to increase by almost 3 Bcf/d this summer year/year, but the key will be gas prices that are high enough to encourage coal burners to run at the expense of gas-fired utilities.
Gas prices would need to remain around $4.50-5.00 range through this summer to encourage switching and allow summer ending levels to reach 3.4 Tcf.
"Assuming 'normal' summer weather and no transportation bottlenecks (yes, these are big assumptions), our model currently suggests that the U.S. gas market will be 2.1 Bcf/d looser during the summer season, enabling October ending storage to reach 3.4 Tcf," but the wild cards are whether:
Enough takeaway capacity exists for the Appalachian-driven supply growth to reach the market;
Pricing dislocations in the Northeast disrupt the coal-to-gas switching pricing model; and
Lower Canadian imports/higher Mexican exports play out.
The Gulf Coast-centered Henry Hub will likely trade at a premium to many other regional markets in North America because of the long list of gas-consuming projects: crackers, gas-fueled power plants, gas-to-liquids, ammonia plants and LNG/Mexican exports.
"With nearly 21 Bcf/d of gas-demand projects over the next few years, we believe the market could be underestimating the impact that these projects could have within the natural gas supply/demand dynamics," said the analysts. "While long lead times and potential construction delays could make the exact timing difficult to predict, based on the number of projects that have been announced, we believe the market could achieve relative equilibrium with gas prices trending closer to the $4.50/MMBtu range."