Another hot summer, combined with a continued move by power generators to switch to natural gas, has reduced the big storage overhang and should send natural gas prices higher, according to Goldman Sachs.
Goldman's updated 3Q2012 New York Mercantile Exchange (Nymex) natural gas price forecast is set at $2.90/MMBtu from $2.10. The average price forecast for full-year 2013 is $4.00/MMBtu.
"Our revised near-term forecast is slightly below current prices as the market is pricing in too much support from weather, in our view, and we expect prices will come under renewed downward pressure later this quarter as the heat subsides and injections pick up," wrote analysts David Greeley, Jeffrey Currie and Johan Spetz.
However, the trio remains "bullish on U.S. natural gas prices in 2013." Analysts expect to see "ongoing producer response" to lower gas prices, combined with a normal winter, which would reduce fuel switching next year "allowing prices to move sustainably higher."
Nymex natural gas prices have rallied 92 cents/MMBtu, or 42%, from their lows in mid-June on "strong demand" from the power generation sector.
Slower production growth and a return to normal winter weather next year would "reduce the amount of price-induced coal-to-gas substitution required," said the analysts. "The shape of the U.S. coal-to-gas switching stack implies that prices can move back to $4.00/MMBtu relatively quickly as the amount of switching is reduced to around 2.5 Bcf/d."
However, the "upside is likely to be modest as the long-term potential of shale gas remains very impressive and the structural demand shifts on the horizon are all associated with high levels of policy risk."
The heatwave this summer has cut into the "reliance" on coal-to-gas switching in 3Q2012, and that should allow gas prices to escalate, said the analysts. Switching levels "proved resilient" when gas prices moved higher in 2Q2012, indicating that switching "can be sustained at a higher price than we previously expected."
Hedging opportunities for U.S. producers remain "limited, given current low prices," but for consumers "there are good opportunities...to hedge longer-dated natural gas," said the analysts.
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