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Goldman Analysts Say Summer 2012 Price Rally 'Gone Too Far'

Notwithstanding Wednesday's 11.8-cent decline in June natural gas futures (see Daily GPI, May 3), some market analysts believe the larger rebound in prices over the last month from sub-$2, 10-year lows is a sign of a tightening supply-demand balance ahead. However, "while we believe that summer 2013 prices have more room to rise, we believe that the rally in summer 2012 prices has gone too far," said Goldman Sachs analysts David Greely and Johan Spetz.

In a research note Thursday the analysts said U.S. natural gas prices have recovered recently on more supportive weather and increased confidence in a production response to the recent low prices. In addition to a record level of coal-to-gas switching, lower imports from Canada have been required to accommodate the U.S. storage surplus this year, the analysts noted. That said, the pushing back of gas has led to very high inventory levels in Canada, which Greely and Spetz believe will likely require further production curtailments north of the border or increased exports to the United States this summer.

The fact that the Nymex June 2012 contract has risen $0.26/MMBtu after bottoming under $2.00/MMBtu on April 19 is the result of a number of recent shifts in the industry. In addition to supportive comments from both gas and coal producers during recent earnings calls, the decline in the gas rig count to new lows, a recent report from the Energy Information Administration has also helped to bolster prices, Greely and Spetz said. Government data shows production declined by 0.4 Bcf/d to 65.5 Bcf/d in February, which the Goldman analysts said confirmed the decline in Haynesville production that was suggested by pipeline flows in February. Nymex futures prices for July and August currently are running in the $2.40s.

"We continue to see upside to summer 2013 prices, but think that the rally in summer 2012 prices has gone too far," the analysts said. "Mounting evidence that production is responding to low prices, including comments from both natural gas and coal producers, new lows in the gas directed rig count, and recent EIA data confirming production declines in February, sparked a sharp rebound in natural gas prices." Those factors "lend support to our view that prices will rise back to $4.00/MMBtu in 2013."

However, Greely and Spetz said U.S. natural gas prices will "need to remain low this summer in order to continue to motivate record high levels of coal-to-gas substitution, including in the PRB coal burning regions, which will likely be necessary to avoid breaching storage capacity, given the massive overhang of natural gas in storage following one of the warmest winters on record."

The team added that they believe U.S. net imports will stabilize in 2013-2014, with liquefied natural gas (LNG) exports potentially adding a new export pull on U.S. gas from 2015 forward. Taking into account the effects of the record warmth in 1Q12, Greely and Spetz expect total U.S. net imports to decline by 1.3 Bcf/d year-over-year in 2012. However, more seasonable winter weather next year will likely mean that the decline in net imports in 2013 will be reduced to 0.2 Bcf/d.

Another factor in the supply-demand balance will enter the mix in 2015 when the first exports of LNG from Sabine Pass in Louisiana are set to begin. The export plan proposed by Sabine Pass received Federal Energy Regulatory Commission approval during the middle of April (see Daily GPI, April 17).

"This change would be more supportive for prices, of course, as it would result from a pull on U.S. gas from foreign buyers, as opposed to the current push resulting from the U.S. domestic oversupply," the analysts said. "In addition, with Canada also set to increase LNG exports, the two countries combined could be exporting close to 4 Bcf/d in 2015."

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