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NatGas Prices in Quandary as Coal Plants Retired, Onshore Supplies Grow

Large-scale coal plant retirements through 2015 could provide some price recovery for natural gas by year's end, but the continuing onslaught of supply from a few onshore basins may exert an opposite effect, a quandary that has analysts puzzling over which way the market may trend this year.

This year the electric power industry is poised to become increasingly dependent upon gas, with large-scale coal retirements serving as a primary catalyst for increased coal-to-gas fuel-switching. However, near-term domestic prices may struggle to gain momentum until there's more evidence of stalling supply, according to Jefferies LLC.

Jefferies analyst Jonathan D. Wolff and the firm’s Americas equities team last week outlined a bearish case for domestic gas prices in 2015. The firm has re-set its 2015 gas price forecast at $3.50/MMBtu, with a long-term view beginning in 2016 of $4.25. Even though exploration and production  companies are reining in capital spending plans, it won't be enough to stem the flow of production, with U.S. supplies forecast to exit the year around 849 MMcf/d higher than in 2014.

"We expect U.S. natural gas prices should gradually recover on better demand (coal-to-gas switching), reduced supply growth due to transportation bottlenecks (Northeast) and lower associated gas growth on falling liquids development," Wolff wrote.

Jefferies analysts are concerned about onshore gas supply, which is falling -- but not everywhere. By the end of this year, active onshore gas basins still are see lifting domestic supplies overall by 1.1%, with an exit rate of 68,805 MMcf/d, versus year-end 2014 production of 68,056 MMcf/d, Jefferies said. Total dry production is forecast at 73,249 MMcf/d, 1% higher than last year.

The Energy Information Administration reported gas production in the Lower 48 rose marginally in November to 81.54 Bcf/d, an increase of 0.76 Bcf/d (0.9%) from October (see Daily GPI, Feb. 3).

Where Jefferies sees the gas gains through this year is no surprise, nor are there any shockers on the other end of the spectrum. Utica Shale gas production from Ohio is expected to pace all other gains this year, increasing 38% to an exit rate of 3,200 MMcf/d. At the end of 2014, Ohio gas output was estimated at around 2,318 MMcf/d. By comparison, the 2013 exit rate from the still-emerging play was 801 MMcf/d, and it was 184 MMcf/d at the end of 2012.

West Virginia, seen up 19% this year, and Pennsylvania's Marcellus Shale, forecast to rise by 10%, are in the No. 2 and 3 positions, according to Jefferies. Other gas production gains are projected from Colorado's Denver-Julesburg Basin (6%); Permian Basin (4%); and Texas Gulf Coast, including the Eagle Ford Shale (2%). Gas output from both the Bakken Shale and Anadarko Basin is expected to decrease by 9%, while Powder River Basin output could be down 8%. A 7% decline in gas output from a year ago is projected from the Fayetteville Shale, while a 6% drop is expected from both East Texas plays (Cotton Valley/Haynesville) and the mature fields in the Northeast.

Analysts are projecting Uinta Basin gas production should fall off by 5% from 2014, while other mature plays in the Rocky Mountains may see output off by 4%. Output from the granddaddy Barnett Shale is expected to decline by 3% from 2014, while Green River Basin gas production should remain almost flat, down about 1%.

While gas supplies may be trending slightly upward, the domestic market is going to get a big lift from the boost in power generation, according to BNP Paribas. On Friday the 2015 price forecast was fine-tuned because of an expectation of "moderately" softer prices through June and a "constructive" second-half of the year. Delivered gas prices are expected to average $3.20/MMBtu in 2015, said BNP director of commodity strategy Teri Viswanath.

"Our front-loaded revisions suggest delivered gas prices will average $3.20/MMBtu in 2015 versus the $3.30/MMBtu previously predicted," she wrote. "What's more, the prospect of a more balanced market in 2015 paves the way for structural demand recovery in 2016, with delivered prices expected to average closer to $4/MMBtu."

As Viswanath said last month, the U.S. electric power industry should become more dependent on domestic gas this year because 15 GW-plus of baseload power plant generation is set to retire by year's end, the majority of which is coal-fired (see Daily GPI, Jan. 20). A lot of the retirements are slated to occur in states where gas-fired generation would assume the replacement requirements, taking about 1.1 Bcf/d of incremental gas, she wrote.

"As such, there is a definite bias toward a heavier power burn in the second half of 2015 as gas generators are increasingly utilized to replace the aggregate lost capacity," she wrote. "Furthermore, we expect that the 0.32 Bcf/d of incremental gas required in January will balloon to a more significant 1.74 Bcf/d of replacement requirements by December."

For the gas market, now "in free-fall as a result of too much production and too little heating demand, the demand-side balancing we envision should not only establish a floor for prices but will likely enable significant price recovery by year-end," Viswanath said.

Meanwhile, oil prices aren't going anywhere either, according to Jefferies, which is forecasting West Texas Intermediate prices to average $50.25/bbl, with 2016 prices at $64.50. Brent prices are set to average the same in 2015, $50.25. Those low oil prices may do a number on several of the greenfield liquefied natural gas (LNG) export proposals, Wolff said. "LNG project deferrals are likely on weak oil" as global trade is oil-linked.

"We expect producers to lower 2015 budgets to plan for prices closer to the current $50/bbl oil curve," said the Jefferies analysts. "Natural gas is also soft with the 12-month strip at $2.90/MMBtu. There's still a lot of gas production coming, even if it's only from a few select basins. Inventories as of Jan. 30 stood at 2,428 Bcf and were 468 Bcf more than last year and 29 Bcf below the five-year average (see Daily GPI, Feb. 5).

The U.S. rig count continues to decline, according to Baker Hughes Inc. In its weekly report on Friday, the domestic rig count fell from a week ago by 87 total to 1,456, which 315 fewer than a year ago. Five gas rigs were dropped to bring the count to 314. Eighty-three oil rigs were dropped, with the total count at 1,140. The horizontal drilling rig count fell by 80 to 1,088.

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