More independent energy analysts last week joined their brethren in raising their forecasts for U.S. natural gas prices this year. The U.S. Energy Information Administration (EIA) also lifted its expectations for Henry Hub spot prices in the latest Short-Term Energy Outlook (STEO).
According to EIA, spot prices, which averaged $2.75/MMBtu at the Henry Hub last year, should climb to an average of $3.52 this year and $3.60 in 2014. The 2013 price forecast is an 11 cents/MMBtu increase and the 2014 number a 3 cents/MMBtu decrease compared with EIA’s previous forecast (see NGI, March 18). Natural gas spot prices averaged $3.81/MMBtu at the Henry Hub in March, up nearly 48 cents from the $3.33/MMBtu average seen the previous three months. March was about 17% colder than forecast in last month’s STEO, which contributed to an increase in natural gas consumption and larger-than-expected storage withdrawals, EIA said.
As of April 5, working gas stocks totaled 1,673 Bcf, which was 804 Bcf less than at the same time in 2012 and 66 Bcf below the five-year average, according to EIA’s Weekly Natural Gas Storage Report. EIA projects that working gas stocks at the end of this summer’s stock-build season will reach 3,793 Bcf, about 137 Bcf below the level at the same time last year.
“Unusually cold temperatures in March led to larger-than-expected withdrawals of natural gas from storage,” said EIA Administrator Adam Sieminski. “The 94 Bcf of gas pulled out of storage for the week ending March 29 was the largest net withdrawal for this time of year since EIA began its weekly storage data collection in 2002.”
Natural gas futures prices for July 2013 delivery (in the five-day period ending April 4) averaged $4.07/MMBtu. The lower and upper bounds for the 95% confidence interval for July 2013 contracts are $3.16/MMBtu and $5.23/MMBtu, respectively, compared with $1.56/MMBtu and $3.69/MMBtu at this time last year.
EIA also is projecting that natural gas marketed production will increase to 69.3 Bcf/d this year and 69.4 Bcf/d in 2014 from 69.1 Bcf/d last year. “Onshore production increases slightly over the forecast period, while federal Gulf of Mexico production declines,” the agency said.
Natural gas consumption is forecast to average 70.3 Bcf/d in 2013 and 70.1 Bcf/d in 2014. Natural gas pipeline gross imports, which have declined over the past five years, are projected to remain near their 2012 level over the forecast period, and liquefied natural gas imports are expected to remain below 0.5 Bcf/d through 2014.
Analysts with Raymond James & Associates Inc., Tudor, Pickering, Holt & Co. Inc. (TPH), Morgan Stanley and Wells Fargo Securities LLC joined a growing chorus of independent Wall Street firms in forecasting higher prices, for many of the same reasons: a cold end to winter and recent EIA-914 data that indicates declining onshore production. Earlier this month Goldman Sachs, Barclays Capital and Stephen Smith Energy Associates also predicted higher gas prices in 2013 (see NGI, April 8).
“While Punxsutawney Phil’s prognostication for an early end of winter was wrong and we saw gas prices increase, the colder winter ending weather has made us more bullish on gas prices for 2013, thus we are raising our 2013 gas price forecast by 60 cents from $3.25/Mcf to $3.85/Mcf,” wrote Raymond James analysts led by J. Marshall Adkins. The higher price forecast “is still slightly below the strip as we believe higher winter prices will encourage a reversal in the coal-to-gas switching through spring 2013. Thus, we expect summer 2013 natural gas prices to strengthen as the market struggles to refill gas storage this summer.”
In the longer term, “gas fundamentals should continue to be relatively tight as cheap U.S. natural gas prices encourage solid demand growth but low-cost shale gas allows the 2014 gas price to balance the supply and demand at $4.00/Mcf. This represents a 25 cent increase from our prior forecast. Longer term, we remain convinced that both U.S. gas demand and U.S. gas supply can grow profitably at a $4.25/Mcf gas price.”
From a gas storage perspective, “we think that summer 2013 U.S. gas prices will need to remain high enough to encourage a substantially looser year/year (y/y) 2013 summer gas supply/demand equation. That means 2013 gas prices must stay high enough to either reduce y/y demand and/or increase y/y gas supply from winter levels. Accordingly, we now think that an average gas price of $4.00/Mcf-plus for the next three quarters will be necessary to reverse from the winter heating season tightness (of around 2 Bcf/d undersupplied) to a much looser (or 2.6 Bcf/d oversupplied) gas supply/demand situation during summer injection season…”
TPH analysts noted in their review that U.S. weather was 6% colder than normal in 1Q2013, with the brunt of it coming in late March. As important, it was an “impressive 28% colder” than in 1Q2012. “The cumulative storage draw during 1Q2013 was 1,830 Bcf versus 1,430 Bcf 10-year norm and a paltry 1,020 Bcf a year ago,” said the TPH team. “In fact, the 1Q2013 draw was the largest during the last 10 years.”
The TPH analysis “suggests that 215 Bcf of the 400 Bcf excess draw versus normal (1,830 Bcf less 1,430 Bcf) is explained by colder temps, which leaves another 185 Bcf draw to be explained by improving supply and demand fundamentals relative to 10-year norms,” which in turn implies a 1-2 Bcf/d “undersupplied gas market heading into summer injection season.
The last two heavy storage draws obviously had an impact on production forecasts, but some market-watchers suggested there also could be some other factors at work in the storage draw-down. In addition to the colder weather, some of the large draw could be blamed on storage mechanics and the deadlines for customers to withdraw all of the past year’s gas in the near future, so this year’s fills can begin. Also, customers likely paid less than current prices over the past year for the gas in storage and used up their cheaper storage gas on the last winter blast, betting that the market would go lower as it gets further into the shoulder months.
The year-on-five-year average gas in storage, which had been in a significant surplus situation for quite some time, slipped into a deficit for the week ending March 29, when the EIA reported inventories were 37 Bcf below the five-year average of 1,724 Bcf. For the week ended April 5, the EIA reported a decrease of 14 Bcf, with inventories at 1,673 Bcf, which is 804 Bcf lower than last year at this time and 66 Bcf below the five-year average.
If the gas market were to remain undersupplied by 1 Bcf/d for the 200 days of injection season, then storage would end at 200 Bcf less than normal, or 3.6 Tcf, noted TPH.
“This would keep gas prices $4.00/Mcf for the summer in order to entice exploration and production (E&P) companies to bring more gas-directed rigs back into service (already our base case for late 2013 and 2014). Even if the gas market is balanced this summer, 3.8 Tcf is not scary as long as production is flat/declining. This is our base case.”
Because of the cold end to winter and lower ending storage, a $4.50/Mcf summer gas scenario is “back on the table,” said the TPH analysts. “Is it possible? Certainly.” Energy Information Administration-914 data production indicates output is “flat/declining, which puts an upward bias on gas price, plus a production response from rig count increase lags six months. This is not our base case but we recognize that hot/tropical weather could enable this scenario.
“However, rising gas prices this summer would likely provide E&P companies with an opportunity to hedge 2014 gas prices at similar levels ($4.50-plus/Mcf), which would increase the chance of an over-correcting supply response. If gas prices rise this summer above current levels, we will become more nervous about 2014 fundamentals. Electricity fundamentals would also suggest that sustained $4.50/Mcf gas through the summer is unlikely as Central Appalachian coal becomes in the money.”
If there were a mild summer, a $3.50/Mcf gas price would be possible “but we believe it would be short-lived.”
Morgan Stanley also lifted its New York Mercantile Exchange gas base-case price by 7% to $3.93/MMBtu from $3.66, which was set just three weeks ago. The updated 2013 bull-case price forecast is $4.11/MMBtu and the revised bear-case view is $3.59. “Better demand trends have taken our end-March inventory estimate down from just under 1.9 Tcf a month ago to just under 1.7 Tcf today,” said analysts Adam Longson and Tai Liu in a note.
More normalized end-of-March storage numbers have reduced the market’s reliance on coal-to-gas substitution in the power sector to balance the market, said the duo. In addition, gas demand will be lifted in the months ahead, they said, by the prospects of lower hydro output in the Northwest, the expectation that at least one San Onfre nuclear unit in California will remain offline this summer, more gas exports to Mexico and additional gas-based power generation capacity.
“As a result, summer gas prices will not need to trade at an artificially depressed level in order to stimulate price-sensitive demand in the power sector.” Longson and Liu said they “see gas prices above $4.00/MMBtu for much of the rest of the year, with the potential for July prices to reach $4.50/MMBtu in our bull case.”
Energy analysts with Wells Fargo Securities LLC increased their natural gas price forecasts for 2013 and 2014 and cut estimates for 2015. The 2013 estimate was revised upward to $3.71/MMBtu from $3.33, while in 2014, gas prices should average $4.30, versus $4.10. The gas price estimate for 2015 was trimmed to an average of $4.50.
“Getting commodity specific, with regard to natural gas, the sentiment is obviously much improved from a few months prior,” wrote Wells Fargo senior analyst David Tameron. “We do note, however, that the change is mostly related to the price reaction in response to weather and ensuing storage levels, not necessarily changes in underlying supply.”
Even with a sharp decline in the number of onshore gas rigs in operation, and the cutback by producers to drill this year in dry gas plays, associated gas from stepped-up oil drilling “has overwhelmed what would have been price signals in prior cycles,” said Tameron. “And we think the next phase for natural gas will be infrastructure projects that have the ability to add meaningfully incremental supply to the market.”
According to Wells Fargo’s numbers, 47 processing expansions or new projects are on the drawing board, along with 15-20 gas pipeline projects (see related story). “While these projects are not exclusively dry gas projects, they should bring ‘stranded gas’ into the market,” Tameron noted.
TPH analysts think that barring a “significant weather event,” such as a “really hot summer,” gas prices may struggle to “stay much above $4.00/MMBtu near term.” Analysts Brandon Blossman and Neel Mitra said at $4 gas prices, “coal and gas are competing for a large piece of the power generation pie, and small differences in gas price, regional supply/demand dynamics and generator behavior drive big changes in relative gas/coal demand.
“At $4.50/MMBtu natural gas, we continue to see coal as the clear favorite, and below $3.50, gas is generally the power generation fuel of choice.” According to the duo, coal-to-gas switching “continues to be THE biggest piece of natural gas demand dynamics,” and 2013 won’t be an exception.
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