Improving U.S. production efficiencies, which are one reason oil prices have crashed, should send natural gas prices necessary to fuel domestic demand on a "downward sloping trend over time," Raymond James & Associates Inc. said Monday. Bank of America Merrill Lynch also reduced its price outlook, but analysts remain bullish longer term.
"Barring short-term wildcards, U.S. natural gas production costs are falling and likely trending lower over the next five years," wrote Raymond James analyst J. Marshall Adkins and his team. Longer-term domestic gas price assumptions "need to come down -- if anyone cares."
Raymond James reduced its 2016 Henry Hub forecast to $3.25/Mcf from $3.55, about 25 cents lower than consensus. The long-term forecast was reset to $3.25 from $3.75. The Energy Information Administration in mid-August said in its most recent Short Term Energy Outlook that Henry prices should average $3.21 in 2016 (see Daily GPI, Aug. 11).
"While there are reasons to believe that the demand picture will look more encouraging in 2017 and beyond, the industry's ability (and willingness) to deliver low-cost supply represents an offset to any gas demand resurgence," Adkins said.
"Structurally bullish" demand factors are emerging, such as liquefied natural gas (LNG) exports, petrochemical plant expansions and an increase in Mexican exports, but "the fact remains that U.S. gas producers can find, develop and produce copious amounts of gas at gas prices of $3.00-3.25."
Two wildcards, however, could lead to temporary price swings on either side of the forecast: more takeaway capacity from the Appalachian Basin and weather events like El Nino.
The amount of gas trapped in the Appalachian Basin because of pipeline constraints may be substantial.
"We are modeling our best guess, but data is very sketchy," said Adkins. Excluding incremental Northeast pipelines coming online next year and takeaway constraints easing, Raymond James' proprietary "historicals-driven" model captures year/year (y/y) production growth from the Marcellus of around 1.5 Bcf/d.
"This growth would be inadequate growth to overcome declines elsewhere," he said. Specifically, overall y/y growth from the dry gas plays -- Barnett, Fayetteville, Haynesville and Marcellus shales -- is forecast to be about 0.6 Bcf/d. A 0.4 Bcf/d decline is expected at the same time in associated gas plays -- the Permian Basin, Niobrara formation and Eagle Ford and Bakken shales. There's also an expected 1 Bcf/d decline in other plays.
Independent of more takeaway capacity, U.S dry gas production should decrease by 0.7 Bcf/d in 2016 for the November-November gas year, said analysts.
Over the longer term, pipeline capacity additions should lead to more domestic supply growth than the rig activity would suggest, according to Raymond James.
Analysts identified more than 50 announced pipeline projects scheduled to come online in the Marcellus/Utica region through the end of the decade. As differentials between the Northeast and Henry have widened, producers have accumulated a drilled but uncompleted (DUC) well inventory that could be higher than 2,000 in the Northeast alone.
"Although it is difficult to quantify precisely, we think these DUCs could easily amount to more than 10 Bcf/d in production looking for a path out of the Appalachian region over the next several years," said Adkins. "In our view, this is set to increase Northeast production by more than what our proprietary production-by-play model would otherwise indicate."
Weather events also are a big wildcard. An El Nino event is expected this year, which usually leads to "milder than normal weather, while a winter like two years ago would likely leave us short of gas."
Other gas variables in the coming year include LNG exports. There's "too much hype" about U.S. and Canada gas exports, "and the long-term picture in this regard looks even worse now," said Adkins. For example, European gas demand has had a stunning fall to a 20-year low." Most of the proposed North American LNG export facilities "will probably never get built," but some domestic gas should be moving overseas from the Lower 48 beginning next year.
Bank of America Merrill Lynch (BAML) analysts on Monday cut their outlook for New York Mercantile Exchange (Nymex) prices to $3.50/MMBtu from $3.90, reflecting "a falling cost structure and persistently high inventory levels." However, analysts retained "a bullish bias relative to the forward."
BAML projections reflect a belief by analysts that U.S. gas demand "will be very strong next year as thermal coal plants are retired. But most importantly, we expect a bumper year for U.S. natural gas exports to Mexico and to the rest of the world via LNG. Higher prices, in our view, will have to bring U.S. natural gas supply and demand into balance next year."
Gas inventories should be below the five-year "normal" by the end of March, according to the BAML team.