Energy analysts are coalescing around a bullish view for North American natural gas prices through this year and into 2017.
The gas storage injection pace this summer has been consistently light versus a year ago, with Thursday's report 31 Bcf lighter than the injection reported for the same week last year, highlighting a contraction in fundamentals (see Daily GPI, July 1).
"Keeping in mind that spot prices averaged under $2/MMBtu for the entirety of winter 2015/2016, this aggressive run in price, over such a very short amount of time, is attracting the attention of many," Societe Generale analyst Breanne Dougherty said Thursday. "The natural gas market deserves said attention. We have long held a bullish call" for the second half of 2016 (2H2016), with expectations for prices to move higher through the summer.
According to the U.S. Energy Information Administration's (EIA) Natural Gas Monthly issued on Thursday, April dry gas production was lower year/year -- the first year/year decrease for the month of April since 2006. Preliminary dry gas production was 2,212 Bcf, or 73.7 Bcf/d, which was a 0.6 Bcf/d decrease (0.8% less) from the April 2015 level of 74.3 Bcf/d. Demand in April was 2,111 Bcf, or 70.4 Bcf/d, an increase of 3.9%, or 2.6 Bcf/d from year-ago levels.
EIA in June said it expects Henry Hub to average $2.22/MMBtu in 2016 and $2.96 in 2017 (see Daily GPI, June 7). Gas prices are expected to "gradually rise" through the summer but remain lower than a year ago. Total natural gas production out of the onshore unconventional plays, including the Bakken, Eagle Ford, Haynesville, Marcellus and Utica shales, along with the Niobrara formation and Permian Basin, is forecast to be 45.75 Bcf/d in July, a 476 MMcf/d decline compared with an estimated 46.23 Bcf/d in June, EIA said in its latest Drilling Productivity Report (see Daily GPI, June 14).
The bulls for months have pinned higher price expectations on lower production and a hot summer, as gas industrial demand and exports proved disappointing earlier this year (see Daily GPI, March 14).
Societe Generale's once "very bullish" call for 2017 gas prices to average $3.50/MMBtu illustrated the view for an inevitable price correction, Dougherty said. However, the extent and speed of the price move during June came as "even a bit of a surprise to us, given the still present storage overhang." In only 20 days, the firm's bullish view for 2H2016 has been surpassed by the market.
"In a couple of weeks, if our injection outlook materializes, the once 1 Tcf storage surplus will be 500 Bcf," Dougherty said. The lower injection pace, combined with a constructive summer weather outlook and a sustained decrease in production of below 71 Bcf/d, "has provided enough confidence in the market..." Societe Generale is expecting "strong resistance" at $3.00/MMBtu for the next seven to 10 weeks but also "limited downside" because of reduced generation elasticity during the hot summer months.
Bearish fundamentals are on vacation through the summer. Now that the market has moved into the hot months with less demand elasticity, the price risk is "neutral to bullish" in the absence of an aggressive shift toward a mild weather, Dougherty said. The once bullish winter 2016/2017 winter call has softened to neutral with the recent rise in the curve.
"While we expect a late 2016 slight increase in production, we do not see it as being enough to avoid ledger tightening through even a normal winter," she said. "If anything, production risk is currently to the downside, bringing price risk to the upside."
For the first time since the "rise of shale," gas production is not in growth mode -- but demand is. There likely will be some year/year generation softening because of the relative rise in price, but there also should stronger residential/commercial loads, as well as stronger Mexico and liquefied natural gas exports to support the demand side, Dougherty said.
Calendar 2017 looks bullish for gas, and Societe Generale is forecasting an average price of $3.50/MMBtu.
BMO Capital Markets also has raised its outlook for gas prices to reflect the tighter supply/demand balance. Henry Hub assumptions for 2016 were increased to $2.56/Mcf from $2.43, while the 2017 estimate is unchanged at $3.25. Henry Hub prices could trade from $3.50-4.00 by the final three months of this year. For AECO, the price estimate was increased to C$1.86 from C$1.67, while the 2017 estimate is unchanged at C$2.90.
Declining associated gas from fewer onshore oil wells, combined with the early start to air conditioning season, are bullish signs, said BMO analyst Randy Ollenberger.
"We believe that natural gas prices could strengthen further over the balance of the year," he said. Associated gas production should continue to decline as drilling activity continues to sputter, particularly in the gassy Eagle Ford Shale, while growth from the U.S. Northeast is constrained by lack of infrastructure.
The price of oil impacts gas as well, particularly associated gas, which has boomed in the United States with unconventional development. Oil eventually could return to $100/bbl-plus, but it's unlikely for the next few years, barring any major geopolitical developments, said S&P Global Ratings primary credit analyst Tom Watters. He discussed the market outlook during a webinar on Wednesday.
"We have a saying that $50-60/bbl of oil is the new $90-100," he said. "We also believe that at $60-65, much of the production from U.S. shale becomes economically viable and could end up capping the price of oil." Oil prices are expected to become more volatile "as shale players can turn production off and on rather quickly, creating a shorter-term investment cycle that we haven't seen before. Shale, in effect, could become an indirect swing producer -- one based on economics and not subject to the whim of, for example, the Saudis who have typically wielded their surplus capacity to achieve geopolitical ends."
Concerns about the UK exiting the European Union should not "significantly disrupt the underlying fundamentals that ultimately will drive oil prices," Watters said. The primary drivers continue to be high-cost U.S. shale production, output from the Organization of the Petroleum Exporting Countries, inventory levels and global demand for oil.