Extreme volatility in weather or an active hurricane season could alter their fundamentally bullish outlook, but Raymond James & Associates analysts said Monday that tightening supply and demand fundamentals should yield a more bullish summer-ending storage scenario at around 3,100 Bcf, with higher sustainable prices through this year and into 2008.
"This means that natural gas should continue to trade, on average, at better than a 9:1 ratio with crude through Oct. 31," said analysts J. Marshall Adkins, Daniel Horowitz and James Rollyson in their latest Stat of the Week. "Overall, this should translate into a step function in higher gas prices next winter."
The analysts expect "modestly" lower gas storage levels through the summer, which would set the stage for a "more normalized" 7:1 price ratio with crude into next winter, "i.e., gas prices at $10/Mcf if our $70 crude forecast is right."
Contrary to consensus forecasts by other energy analysts, Raymond James analysts think the U.S. gas supply will decline by about 0.75 Bcf/d versus last summer. Most analysts are forecasting U.S. gas supply to increase by 1-2% (or 0.50-1 Bcf/d) this summer.
"The biggest difference that we have with consensus gas storage projections is that we think U.S. gas supply will be falling sharply as we move through 2007," the team wrote. "By the end of the summer (Oct. 31), we are modeling that U.S. gas supply will be down 1.2 Bcf/d (could be as much as 2 Bcf/d)."
The analysts' main argument for declining gas storage is the "sharply declining initial productivity per well" in the past 10 years, and particularly in the past two years, which they believe will outpace increased gas drilling activity.
The analysts acknowledge a rise in liquefied natural gas (LNG) imports, and they expect the highest year-over-year increase in LNG imports to occur in the first three months of summer, averaging 0.80 Bcf/d more than last spring.
However, higher LNG imports will be offset by a "sharp reduction in Canadian gas imports," the analysts wrote. "With the year-over-year Canadian rig count down 20% to 30% over the past nine months, we expect that to translate into a 0.7 to 0.8 Bcf/d decline in Canadian gas supply by the end of 2007." Increasing gas demand, primarily from oilsands growth, "should soak up another 0.3 to 0.4 Bcf/d of Can adian gas supply that would have otherwise come to the U.S. by the end of the year."
Analysts took into account the ramp-up of the deepwater Independence Hub in the Gulf of Mexico, which eventually will bring an additional 1 Bcf/d of gas supply to domestic markets (see Daily GPI, March 9). Raymond James is modeling the facility to come online beginning in July at 0.1 Bcf/d, ramping up to 0.4 Bcf/d by the end of October.
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