Stagnant natural gas production levels, which could fall into a decline before the year's out, and an increase in gas demand for power generation and as a feedstock could spark a price rebound in 2013 as the supply-demand balance returns to equilibrium, according to Stephen Smith of Stephen Smith Energy Associates.

Smith estimated that these factors are going to take the Henry Hub natural gas bidweek average price from $2.68-2.70/MMBtu for full-year 2012 to $3.70/MMBtu full-year 2013.

In his Monthly Energy Outlook released at the end of July, Smith noted that the supply glut has already seen a significant trim this summer. "At the start of April, the gas storage surplus (vs. 2006-2010 norms) peaked out at 900 Bcf," he said. "By early August, this surplus is likely to be close to 360 Bcf, thanks in part to what has been another very hot summer thus far."

He added that two other main factors have combined to reduce the storage surplus. "First, U.S. Lower 48 onshore gross gas production has been essentially flat from November through May, in sharp contrast to an average sequential monthly increase of 0.5 Bcf/d per month for the previous 24 months," Smith said. "Second, with Henry Hub gas prices below $2.50-$3.00/MMBtu, power generation shifts from coal to gas have been much larger than the ongoing trend coal-to-gas shifts of recent years."

By year-end the price analyst said the flat production trend of recent months "is likely to evolve into a trend production decline -- one that could require several months to reverse." When looking at the complete picture, "these factors suggest a better supply-demand balance for U.S. gas in 2013," Smith said.

Data within the Energy Information Administration's (EIA) May 914 gross gas production report seems to confirm the supply-demand trend that Smith points to. In the report the government agency confirmed that Lower 48 gas production was flat while demand is ticking higher (see Daily GPI, Aug. 2). Total gas consumption for May 2012 was 1,850 Bcf, which set a new May record, EIA said. This was an increase of 11% over the previous May record set in 2011. "Deliveries of natural gas to the electric power sector of 819 Bcf drove the trend, reflecting continued displacement of coal with natural gas," the EIA said. Total U.S. production in May was 81.51 Bcf/d, a decrease of 0.1% from a revised 81.56 Bcf/d in April.

In dissecting the EIA's May report, Smith said the flat production trend line that was established last November still appears to be intact.

While pointing out that there has been a 53% decline in the natural gas rig count from November 2011 through May 2012, Smith said "this steady production rate is being achieved by the time-delayed completion of the large inventory of drilled but uncompleted wells that accumulated during the horizontal drilling boom of the last few years. Gas production for the last half year has also been supported by the coproduction of gas from the increasing rate of oil completions. We expect the current flat production trend to gradually transition to a trend decline, most likely beginning in the second half of the year."

Thanks to this trend, Smith said he expects higher gas prices in 2013 as production remains flat for much of the year. "Our assumptions lead to about a 1.5 Bcf/d increase in consumption in 2013, but we are likely to begin 2013 with a still sizeable storage surplus," he said. "All factors combined, and absent major degree-day surprises, odds appear to favor a considerably more balanced market with higher gas prices in 2013."

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