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'Unmanageable' Natural Gas Inventory Level Putting More Pressure on 2016 Prices

The traditional call on natural gas held in storage has been threatened by warm winter weather to date and could lead to an "unmanageable level of inventories" by the end of the injection season, increasing physical congestion through 2016, BNP Paribas' director of commodities strategy said Tuesday. Moody's Investors Service also sharply reduced its U.S. gas price assumptions.

BNP's Teri Viswanath held a conference call to discuss her mid-winter gas price forecast. She was joined by Commodity Weather Group President Matt Rogers, who provided a dismal North American winter weather forecast for gas bulls. The strongest El Nino in years should continue to suppress cold winter temperatures, possibly into February and beyond, Rogers said in an updated market forecast (see related story).

This December to date is the "warmest on record," possibly as far back as the 1800s, he said. Heating degree days for December month-to-date total 648, versus 765.5 HDDs for December 2014 and 1,065.7 in December 2000.

Based on the above-normal temperatures, gas demand looks weak, Viswanath said. Reduced weather-related demand and strong production growth has led to some curtailments by producers, "but we still have very, very strong production on the pipes right now.

"Based on our current estimate, we think the industry withdraws just 1.74 Tcf of stored gas this winter. That compares with 2.18 Tcf five-year average and that's going to leave roughly 2.2-2.3 Tcf in the ground by end of March." The high carry-out inventory levels toward next spring "implies to us a few visible challenges to industry of excess supplies," she said.

The outlook mirrors some analysts' views over the past couple of weeks, which point to gas prices not strengthening through next year because of an oversupply (see Shale DailyDec. 14).

Unlike 2015, "there’s simply fewer options to manage that imbalance," Viswanath said. "At this point, opportunities for additional power demand growth are nearly exhausted. In the absence of extremely hot weather, we see little room for increased power demand in 2016. We do not see additional demand growth out of that sector..."

Many point to increased demand coming soon through gas exports and higher gas use by the industrial sector. Demand from each is "going to be impressive, but not impressive enough to stave off a bad winter," she said.

Viswanath said to look no further than 2015 to understand where gas prices may be going.

"Sharp discounts were required for natural gas prices over the course of the year to really encourage increased demand and to curb in a limited way potential supply growth," she said. "Practically speaking, this meant that in most regions of the country cash prices declined to levels sufficient to encourage that increased fuel switching away from more expensive coal-fired generation. This year, however, when you look at prices and you think of price weakness across the country, more people tend to look at that endemic price weakness we've witnessed in the Northeast...

"We think that really we're going to have to see for the first time supply being priced out of the market simply because we can't...rebalance this summer. At this point, opportunities for additional power demand growth are nearly exhausted. In the absence of extremely hot weather, we see little room for increased power demand in 2016."

BNP now expects gas prices to average $2.25/MMBtu in 2016, versus the original forecast of $3.15. "We had predicted $3.20 for 2016 but now that price looks more like the price environment we will see for 2017," Viswanath said. “It's certainly a bad year ahead."

Moody's on Tuesday sharply cut its price assumptions for U.S. gas and global crude oil and natural gas liquids (NGL). Senior Vice President Terry Marshall and analyst Steven Wood said for both gas and oil, "producers continue to produce without restraint as they battle for market share." Domestic gas output "continues to increase while costs decline and producers earn economic returns at ever-lower prices."

Moody's Henry Hub price assumption is an average of $2.25/MMBtu in 2016.

"This marks a 50 cent/MMBtu cut in our assumptions, as do our new 2017 Henry Hub price assumption of $2.50/MMBtu and our 2018 assumption of $2.75/MMBtu in 2018," Moody's said. "Our $3.00/MMBtu medium-term price assumption reflects a rise in demand from liquefied natural gas and petrochemicals facilities in coming years."

The analysts also revised oil and NGL price assumptions. They expect West Texas Intermediate (WTI) crude to average $40/bbl in 2016, down $8 from a previous forecast. They see prices of $45 in 2017 and $50 in 2018. The Brent forecast, $10 below previous assumptions, is $43/bbl in 2016, $48 in 2017 and $50 in 2018. NGL price assumptions average $12.00/bbl in 2016, $13.50 in 2017 and $15.00 in 2018.

Moody's reduced its stress-case scenario oil price assumptions to $30/bbl for WTI and $33/bbl for Brent, and lowered the stress scenario price for Henry Hub to $1.75/MMBtu.

"Although capital spending has dropped substantially and the U.S. rig count has declined by more than half, U.S. production has only recently begun to decline," the Moody's analysts said. "Moreover, Saudi Arabia and Russia have both increased production to their highest levels since the early 1990s. We do not think global production will fall before the second half of 2016 at the earliest, when the effects of this year’s investment cuts lead to less new production to offset existing declines."

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