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Stern Agee Cuts 4Q NatGas Price Forecast; Still Bullish on Winter Storage Outlook

Mild summer temperatures led Stern Agee analysts to reset their U.S. natural gas price forecast for 4Q2014, but they remain bullish for the winter storage season.

Summer has been a "drag, not a death knell, for gas prices," wrote analysts Tim Rezvan and Truman Hobbs in a note to clients Friday.

The September 2014 New York Mercantile Exchange Henry Hub contract expired at $4.06/Mcf, below Stern Agee's forecast of $4.55. Based on the lower contract, analysts reset the 4Q2014 price deck to $4.15/Mcf from $4.65.

The revised price for 4Q2014 is in line with a "weakening futures strip after a mild summer, despite gas in storage likely to peak at 3.5 Tcf in early November, 5-10% below typical peaks," said the analysts.

"We believe sentiment is as much a driver of price action for natural gas as the underlying fundamentals of storage and demand, and the mild summer has muted much of the bullish sentiment for near-term pricing that originated in the winter. We expect gas in storage to peak at 3.5 Tcf in early November, 6% below the average peak storage of 3.72 Tcf over the last eight years, which will drive heightened volatility in the event we see a typical or severe winter."

Analysts said investors shouldn't be "overly bearish" regarding gas. However, they reduced their 2015 forecast to $4.35 from $4.50.

"Yes, Appalachian bottlenecks will begin easing in '15, supporting growth," said Rezvan and Hobbs. "But we are now a couple of quarters away from a 2 Bcf/d increase in gas pipeline exports to Mexico," and slightly more than one year from liquefied natural gas exports, which they said could be up to 1.2 Bcf/d.

"Lower 48 production growth will keep climbing, but operators and midstream companies continue to find homes for these incremental gas molecules. We expect a $4.00/Mcf gas price to persist through '16." Stern Agee's initial gas price forecast for 2016 is $4.25/Mcf Henry Hub.

The oil price outlook was reduced slightly through 2015 for West Texas Intermediate (WTI) and Brent crude. For 2014/2015, the WTI estimate was cut to $99/94 per barrel. For 2014/2015, the Brent estimate is set at $107/104.

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