Robust output from the nation's shale plays and relatively mild winter weather continue to force analysts to trim their natural gas price forecasts, with Bentek Energy LLC on Tuesday saying it expects the market to set a new price floor of $1.94/Mcf this September.
Mild weather across the United States has left record-high natural gas inventories in storage even as production levels continue to climb, and assuming normal summer demand, storage levels could reach 4.3 Tcf by the end of October, according to Bentek analysts.
"The natural gas market is poised to find a new, near-term price floor in 2012, with Henry Hub cash and other supply-area prices bound for $1 handles as early as later winter as mild weather has exacerbated an oversupplied market," Bentek said.
As a result of a below-normal number of heating degree days since November, storage withdrawals have been at historical lows, leaving a growing inventory surplus. "The resulting storage overhand going into this quarter could take months or years to work through, depending on weather conditions and demand," Bentek said.
At the same time, production -- which averaged 4.2 Bcf/d in 2011, 7% higher than in 2010 -- continues to grow at a robust pace, the analysts said. In February, "production is expected to increase 200 MMcf/d, driven primarily by growth in the Marcellus Shale. While extreme freeze-offs reduced production by more than 7.5 Bcf/d for several days in February 2011, a large reduction is not anticipated this year, assuming normal weather."
Weather Services International has forecast a 2.4% reduction in heating demand compared with last winter, despite its forecast of colder-than-normal temperatures moving into the nation's northern tier beginning in February (see Daily GPI, Jan. 24).
Morgan Stanley also cut its U.S. gas price forecast by 30%. Gas prices are expected by the firm to average $2.70/MMBtu this year, which is far below the bank's earlier 2012 price forecast of $3.85.
U.S. heating demand was 450 Bcf less than Morgan earlier had estimated, said Hussein Allidina, head of commodity research. Excess stored gas could be forced on the market to keep facilities operational, causing ratchet issues.
"Natural gas will likely be range-bound between $2.50 and $3/MMBtu for much of 2012, barring any surprises from weather or rig efficiency," Allidina wrote. "Extremely mild weather can cause ratchet and congestion issues, sending prices to sub-$2, but this would be short-lived."
Gas in storage stands at about 3.1 Tcf, which is 531 Bcf higher than a year earlier, said the Morgan Stanley analyst. "With gas at levels where a small change in fundamentals can have large ramifications for the gas balance and prices, any outlier weather event could dramatically reshape the outlook for gas," he wrote.
Moody's Investors Service last week sliced its North American natural gas price assumptions through 2013 and said with "no relief in sight for overproduction and storage," it assumes that gas delivered at the Henry Hub this year will sell for an average of $2.75/MMBtu (see Daily GPI, Jan. 30). That price assumption, which is 75 cents lower than Moody's previous assumption, was based on expectations for ongoing excess gas supply "caused by brisk shale production, aggravated by unusually mild winter weather that has resulted in high inventory levels in underground gas storage facilities."
But relatively low natural gas prices, combined with increased use of liquefied natural gas in markets outside of North America, strong domestic natural gas production and reduced pipeline imports, are likely to result in the United States becoming a net exporter of natural gas in less than a decade, according to the U.S. Department of Energy's Energy Information Administration (EIA) (see Shale Daily, Jan. 24). EIA estimated that average annual wellhead prices would remain below $5/Mcf in 2010 dollars through 2023.
However, beyond 2023, as tight gas and shale gas continue to achieve an increasing share of total production, prices will rise due to an increasing reliance on less productive and more expensive resources, EIA said.