A well supplied market with limited prospects for demand growth in the months ahead will weigh on natural gas prices, according to BNP Paribas' Teri Viswanath, senior natural gas strategist.
They say if you don't like the weather, wait and it will change. That's particularly true this winter as temperatures are expected to see-saw month to month, BNP meteorologist Anneliese Alexander said Friday. That's good for volatility, so some traders might make a buck, but the absence of robust cold, limited demand growth and resilient production don't lend much to natural gas prices.
"With most of the drilling cutbacks occurring during the first half of the year, it stands to reason that production declines should have appeared by now," Viswanath said in a telephone presentation Friday. "And yet, by all accounts, Lower 48 production appears to be holding up rather well and, indeed, might be rising."
BNP is projecting that natural gas will average $4.00/MMBtu next year, rising to $4.50 in 2014 and $5.00 in 2015. "We see sluggish recovery ahead given the relative stability in domestic production and limited prospect for demand growth," Viswanath said. "We maintain that the slow ebb of inventories will forestall most of the recovery in prices until the second half of 2013."
The U.S. Energy Information Administration (EIA) recently raised its 2013 gas price forecast to $3.68/MMBtu, a 5.4% increase from the $3.49/MMBtu forecast EIA issued in November (see related story).
For the end of December, BNP is projecting that natural gas in storage will be 3,511 Bcf, which is 214 Bcf higher than the projection of the EIA's Short Term Energy Outlook. For the end of January, BNP is projecting 2,737 Bcf in storage, which is 213 Bcf higher than EIA projections. For the end of February BNP projects 2,138 Bcf in storage, 161 Bcf higher than EIA; and for the end of March BNP expects 1,919 Bcf in storage, 46 Bcf higher than EIA.
"The persistence of above-normal temperatures in key consuming regions still poses a key risk to our revised end-of-season assumptions," Viswanath said. "With much of our price forecast predicated upon the return of a normal winter, we can only advise that those seeking long exposure curb their enthusiasm about the prospects of any significant rally in the front of the curve in the near term. In our opinion, the back end of the curve offers a more attractive risk-reward in the form of long positioning given our expectation that inventories will gradually recede next year based on our demand and import assumption."
Demand weakness from space heating now is a threat to stronger pricing, as is the potential loss of demand from gas-fired power generators this coming summer, Viswanath said.
As for the weather, it's been warm lately but not so in Europe; however, look for colder temperatures to return to North America, particularly Canada, as the see-saw weather pattern continues, Alexander said. The back-and-forth will continue through January, February and potentially into March as well, she said. Cold, when it comes, will be limited mostly to the northern tier, she said. From the Four Corners area westward she expects temperatures to be above normal.
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