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Jefferies Raises 2017 Natural Gas Price, Cuts 2018 Forecast

Jefferies LLC has revised its U.S. natural gas price forecast slightly higher for 2017, but associated gas output, swelling from the active Permian Basin, should pressure 2018 prices, analysts said.

The 2017 gas price forecast was reset to $3.26/MMBtu from $3.15. The 2018 gas price assumption was cut to $3.30/MMBtu from $3.50. Longer term, however, Jefferies expects gas prices to average $3.50/MMBtu.

The long-term gas price forecast remains higher "as we see the growing supply will be necessary" to meet increasing demand from liquefied natural gas (LNG) and Mexican exports, as well as rising industrial and power demand, said analysts Zach Parham and Michael Hsu.

The U.S. Energy Information Administration earlier this month forecast Henry Hub spot prices would average $3.17/MMBtu this year, with new export capabilities and growing domestic consumption driving prices even higher in 2018 to $3.43/MMBtu.

The changes to the gas price forecast are based in part on the revamped U.S. oil production model issued by Jefferies on Wednesday, which in turn pushed associated gas volumes higher.

By the end of 2018, Jefferies expects Permian gas volumes could grow by 2.5 Bcf/d in aggregate. Permian gas output now is forecast to increase by 0.6 Bcf/d from a prior model and exit 2018 at 6.0 Bcf/d, about 21% higher year/year (y/y). Meanwhile, Eagle Ford Shale gas output is forecast to decrease by only 0.4 Bcf/d from a previous forecast decline of 0.6 Bcf/d.

"Overall, our model now expects U.S. dry production to increase by 2.0 Bcf/d versus an increase of 1.4 Bcf/d previously," said Parham and Hsu.

LNG feed gas demand now is expected to reach 2.7 Bcf/d by the end of this year, compared with a previous forecast by Jefferies of 2 Bcf/d. Gas storage is seen exiting this summer at 3.8 Tcf, about 0.4% above the five-year average and 130 Bcf (3%) below prior-year storage levels.

"The largest y/y changes include power demand down 3.5 Bcf/d, based on higher y/y gas prices and stronger hydro generation on the West Coast, as well as higher exports, with LNG up 2.0 Bcf/d y/y and Mexican exports up 0.9 Bcf/d y/y," analysts said.

Gas exports should tighten the market going into next winter from expected growth in late 2017 as Sabine Pass trains 3-4 ramp up and Dominion Cove Point begins operations.

Supply and demand fundamentals "will likely remain tight unless supply growth surprises to the upside. We expect a ramp in late 2017 Appalachia production, assuming pipelines enter service as planned," including Rover Pipeline and Leach Xpress, "but a portion of this growth will be offset by additional legacy gas declines through much of the U.S." said Parham and Hsu.

On the gas supply side, the Jefferies team noted that domestic output rarely has tracked outside 70-71 Bcf/d year to date.

"We expect back half-weighted growth for U.S. natural gas, with Appalachia and Permian leading the way, offset partially by falling production in many legacy gas regions, with the exception being the Haynesville," where more gas rigs are rising. NGIrecently published a14-pagespecial reportabout the charge back into the Haynesville Shale.

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