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Raymond James Joins NatGas Bulls, Sees Stronger Prices Through 2018

Falling supplies and healthy demand have led Raymond James & Associates Inc. to join other gas bulls by raising its 2016 Henry Hub forecast and lifting the outlook for 2017 and 2018.

The supply/demand equation is "looking much more bullish" for the next two years, analyst J. Marshall Adkins said in a note Tuesday. Adkins and his colleagues join other independent energy analysts who now expect to see higher gas prices (see Daily GPIJuly 1).

The 2016 Henry Hub price forecast was increased to $2.47/MMBtu from $2.05. For 2017, prices are expected to average $3.25/MMBtu versus a previous forecast of $2.65, while 2018 prices were set at $3.00 from $2.50. Beyond 2018, Raymond James long-term forecast remains capped at $2.50/MMBtu because of high production growth.

"While the gas futures market is already directionally pricing in higher gas prices over the next few years, we think there is still more upside than the futures prices reflect for 2017," Adkins said. Small exploration and production companies "with significant exposure to natural gas" appear to "stand the most to win from the 2017 gas price upside..."

Raymond James now is forecasting the Marcellus Shale rig count this year to be down by about half from 2015, which would lead to a 2017 gas supply increase of about 1.3 Bcf/d, versus 4.3 Bcf/d of growth in 2015. Adkins and his colleagues initially had expected to see a 3.7 Bcf/d increase from the Marcellus this year.

The gas model "is now 1.8 Bcf tighter compared to our January model, and summer 2017 storage ends a very bullish sub-3,700 Bcf," Adkins said.

Most of the energy market has been celebrating higher crude oil prices, but U.S. gas has put together an impressive move, he said. "In our view, this 50% increase in spot pricing (and 15% increase in 2017 futures prices) signals that the market has largely factored in directionally more bullish gas fundamentals for 2017..."

Drilled but uncompleted wells, i.e., DUCs, and Northeast pipelines partially offset rig declines, but they don't last forever, Adkins said.

"Per our model, gas production is being partially offset by increased Northeast infrastructure builds, freeing up shut-in gas, and DUCs, which we believe will support 2016 gas production by over 2 Bcf/d year/year (y/y) relative to organic (rig count driven) gas supply declines."

Across most of the onshore basins, organic U.S. output is expected to decline by 2% this year, offset in part by incremental Northeast takeaway capacity. Adkins said the firm now expects 2016 net natural gas volumes to be up only 0.9 Bcf/d y/y, versus a previous 2.4 Bcf/d estimate.

The 2017 winter season now is expected to show a 1 Bcf/d decline y/y, which turns positive by April when supply begins to accelerate. By September 2017, supply could be more than 3 Bcf/d higher than in 2016 because of DUC completions, renewed drilling/completions activity and more Northeast infrastructure investments.

For full-year 2017, Raymond James now is forecasting U.S. gas supply growth of 1.3 Bcf/d, versus a January 2016 model of 3.7 Bcf/d y/y growth.

"Clearly, the rapid supply shock throughout 2017 from no growth to over 5 Bcf/d of growth near year-end implies a loosening gas market as the year progresses, which is reflected in higher first half 2017 prices versus second half 2017."

Of course the forecasts hold "big uncertainties," Adkins said. Among them are the current shut-in volumes and DUC inventory, along with Mexico's appetite for U.S. gas, coal-fired electric capacities, Northeast-to-Gulf cost price differentials and the weather.

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