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Slightly Higher Natural Gas Prices Forecast

July 22, 2013
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Wells Fargo Securities analysts last week increased their outlook for natural gas prices to reflect 2Q2013 average pricing. They also expect to see "slightly increasing" gas output as badly needed infrastructure in the Marcellus, Utica and Eagle Ford shales comes online.

The higher gas price deck reflects actual average pricing in 2Q2013 of $4.20/MMBtu, said senior analyst David Tameron and his colleagues. As a result of the actual prices for 2Q2013, "our 2013 natural gas price is now $3.80, up from $3.71/MMBtu previously. Our 2014 price forecast remains at $4.30MMBtu."

The forecast meshes with that of the U.S. Energy Information Administration (EIA), which expects Henry Hub prices to average a bit higher this year, even though its forecast this month was not as optimistic as in June (see NGI, July 15). EIA expects Henry Hub prices to average $3.76/MMBtu, down from June's forecast of $3.92/MMBtu. Raymond James & Associates Inc. said in June the pieces were in place for gradually improving gas prices over the next few years (see NGI, June 24).

Wells Fargo cited weather and power generation as "the defining and counterbalancing demand drivers thus far in 2013. A longer winter drove storage to a deficit entering the shoulder season and prices rebounded, increasing to a peak of $4.40/MMBtu in April." That shifted generation to coal's favor, while industrial demand is expected to increase on several projects slated to ramp on by the end of the year. "Together, overall demand looks to be roughly flat with 2012 levels."

Analysts also has modeled slightly more gas production in 2013, underpinned by month/month gains in the second half of the year as infrastructure in the Marcellus, Utica and Eagle Ford shales starts service. "Overall, we see 2013 production levels up slightly from 2012 driven by gas associated with liquids drilling, efficiency gains, ethane rejection and infrastructure debottlenecking support production levels in the face of a declining dry gas rig count."

A rebound in gas prices is "fairly self-regulating in our view, as they incentivize producers to restart gas programs and coal switching is likely to accelerate north of $3.50/Mcf, which should cap any sustained rally. Further, pipeline additions in the Marcellus and Eagle Ford could negatively impact the storage figures by allowing for incremental supply.

"Gas rig counts have fallen to levels not seen in the past decade -- once any backlog of completed, and as-of-yet offline wells are brought into the picture, it will likely take some time to catch up to the natural decline rate."

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