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Summer A Brief Respite for Natural Gas Bulls, Says Barclays

Too much supply, too little demand has been the long-time refrain for U.S. natural gas markets, but bullish factors could rally the market, albeit briefly, this summer, a Barclays analyst said Monday.

"The bulls had better not blink though, because the fundamentals won't stay in their favor for long," analyst Michael Cohen wrote in the Natural Gas Market Outlook. "Northeast production additions in 4Q2015 will push the market back into oversupply and leave it waiting for signs of incremental demand growth in 2016."

Mark to market prices in the second quarter exceeded Barclays expectations, leading the firm to adjust gas prices higher in 3Q2015 before they decline again late this year. Third quarter prices are expected to average $2.80/MMBtu, with fourth quarter prices averaging $2.75. For the year, gas prices are forecast to average $2.78/MMBtu. The Energy Information Administration in early June also nudged its forecast for U.S. gas prices higher; Henry Hub prices for 2015 are forecast to average $2.97/MMBtu, a 4-cent increase from May (see Daily GPIJune 9).

With few signs of lower production, the market already has backed in an end-of-season storage injection number of at least 3.9 Tcf, Cohen noted.

"However, signs of slowing production growth, along with strong power burns, are likely to mean that storage builds start to slow relative to last year's levels." By late October, bulls could begin to retreat as a big wave of Marcellus/Utica shale gas storage additions come online, pushing the market back into surplus.

Barclays is forecasting Lower 48 production this year to average 72.4 Bcf/d, down from a March forecast of 73.2 Bcf/d. The lower figure follows second quarter maintenance in the Northeast, which limited production, while low regional prices led some producers to shut in production and delay well completions. As new infrastructure comes online in the Northeast, output by the end of the year should recover to levels of December 2014, when output was around 73.5 Bcf/d.

"After reaching an all-time high of 73.7 Bcf/d in December 2014, production levels have steadily ticked lower by 1.4 Bcf/d," Cohen wrote. "The initial drop witnessed in January and February was blamed on well freeze-offs. However, as the weather warmed, production levels have failed to bounce back. Initial pipeline scrapes indicate production is falling off in the associated gas plays in Texas, along with offshore Gulf of Mexico, but production in the Marcellus is still poised to grow strongly once maintenance and new capacity is complete."

Most of the Northeast's next big gas growth won't arrive until the fourth quarter, but in July, Rockies Express Pipeline's Zone 3 east-west pipeline is scheduled to begin transporting up to 1.2 Bcf/d (see Daily GPIJune 4June 3).

"Production from the Northeast should help to keep production levels largely static at around 72 Bcf/d through the fall, despite declines in other regions," Cohen noted.

Since the start of the year, Henry Hub prices are averaging around 42% below 2014 levels, but hedging has allowed some exploration and production (E&P) companies to continue to produce; For how long is a question.

"According to analysis done by Barclays Credit Research, high yield E&P companies have protected 51% of their oil and gas volumes at a price of $78.45-87.42/bbl for oil and $4.17-4.23/MMBtu for natural gas," Cohen noted. "The same analysis shows that just 27% of 2016 production is currently hedged as producers have likely been more hesitant to hedge at such low prices."

The recent strength in power burns is another bullish indicator, Cohen said.

Gas has a bigger footprint in the U.S. power sector today, boosted by low prices and the wave of coal plant retirements forced in part by the Environmental Protection Agency's Mercury and Air Toxics Standards (see related story). More than 5,000 MW of coal capacity was retired in June, which means around 300 MMcf/d of incremental power burn between June and July.

"Through the first quarter, power burn in the U.S. averaged 23.1 Bcf/d, an increase of 3.4 Bcf/d over last year. That number has moved higher as summer cooling demand has now started, and recent estimates for this week have placed power burn consistently above 30 Bcf/d. We are forecasting power burn to average 26.4 Bcf/d for 2015, up 4.1 Bcf/d from last year and largely the only source of incremental gas demand in the U.S. this year."

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