Fitch Ratings on Wednesday cut its U.S. natural gas price deck for 2012, with the base case Henry Hub (HH) price at $2.75/Mcf, on weak pricing and the prospects of an ongoing oversupply in the domestic markets.
"While recent heat wave conditions have pushed electric generation usage up sharply this summer, this has been balanced against a very mild winter, which has led to average year-to-date pricing of just $2.43/Mcf as of the end of July," write analyst Mark C. Sadeghian and his team.
With a view of a "modest, longer-term decline" in gas prices, Fitch cut the long-term, midcycle gas price to $4.50-5.00/Mcf.
"This drop reflects the fact that catalysts for higher natural gas usage are modest, and the economics of shale-based liquids projects continue to drive capital expenditure (capex) decisions, resulting in the treatment of associated gas as a by-product in a number of plays, allowing producers to tolerate lower all-in natural gas prices," said analysts.
The West Texas Intermediate (WTI) base case price deck for 2012 was raised to $92.50/bbl "to reflect near-term market factors," with the 2012 stress case WTI raised to $80/bbl; the long-term stress case price is unchanged at $50/bbl. Fitch's long-term base case price for oil is set at $65/bbl.
"Oil and liquids prices continue to drive the majority of capex decisions in the exploration and production (E&P) space, although some operators have begun to scale back operations in select plays in response to lower natural gas liquids (NGL) pricing and cost inflation," noted Sadeghian. "Current oil prices remain well above Fitch's long-term midcycle levels.
"While prices could rise higher due to nonfundamental reasons (rising geopolitical risk premium, inflation hedge), Fitch believes that risks to oil prices on the downside remain significant. The latest International Energy Agency (IEA) forecasts predict a modest uplift in global demand of 1 million b/d-plus in 2013, with growth concentrated in Asia Pacific and other regions that are not part of the Organization for Economic Cooperation and Development. IEA also forecasts growing spare capacity from Organization of Petroleum Exporting Countries (OPEC) and non-OPEC sources, further cushioning against shocks."
The Brent-WTI spreads have remained "surprisingly strong" so far this year with "good visibility on many logistics projects to further ease the bottleneck at Cushing, OK." Year-to-date, the Brent-WTI has averaged $15.88/bbl, close to levels seen in 2011. "However, Fitch anticipates that this spread will continue to narrow in out years as growing pipeline and rail are expanded to relieve this bottleneck. Fitch is modeling a $12.50/bbl spread of Brent over WTI for 2012, with the spread dropping to $5/bbl in the long run to reflect this narrowing premium."
Fitch also upped its European natural gas price deck with 2012 base case Balancing Point (NBP) prices at $8.00/Mcf, and long-term prices also increased to $7.00 from $6.50. "The increase in near-term NBP prices reflects the correlation between gas and oil in Europe, as natural gas hub prices are more strongly linked to oil in Europe than in the U.S. Long-term European natural gas prices were revised up slightly to reflect Fitch's expectation of robust gas demand and competition with Asia for supply."
Fitch's price deck isn't meant to be a price forecast, but rather is "intended to reflect a more conservative view of future price levels for modeling and rating purposes, and for evaluating future commodity price expectations from a bondholder's perspective," analysts noted. The price deck will often remain below current spot and futures markets prices as a result. In addition, the price deck "is intended to reflect only supply/demand fundamentals, particularly long-term (midcycle) prices, with the recognition that other nonfundamental factors (weather, geopolitical risk, heightened inflation expectations, impacts of central bank easing) can result in significant deviations from fundamental levels."
©Copyright 2012 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.