Wintry weather boosted natural gas consumption and has lifted prices, but the trajectory of U.S. supplies largely has remained unchanged, and that means gas prices may “hunt” this year for the right level of gas-to-coal displacement to keep the market balanced, according to an analysis by Barclays Capital.
“In other words, the iteration between the trajectories of production, prices, coal-to-gas displacement, and end-of-season storage projections remains the four-wheeled base of natural gas markets in the U.S.,” wrote analysts Biliana Pehlivanova and Shiyang Wang in a note Tuesday.
“Given market fundamentals and assuming normal weather for the rest of the year, we expect the market to balance,” with average prices of $4.00/MMBtu in 2Q2013 and 3Q2013, rising to $4.10 in the final three months of the year. Storage levels are predicted to be about 3.9 Tcf at the end of October.
Based on the review, the Barclays analysts revised their average gas price forecast for this year upward to $3.90/MMBtu from a December forecast of $3.70 (see Daily GPI, Dec. 7, 2012). Last week, the analysts said they didn’t expect the domestic gas rig count to break 450 this year (see Daily GPI, April 1).
“With the forward curve currently near $4.10/MMBtu for the remainder of this year, prices may have ran ahead of fundamentals, but only slightly so. Indeed, the late season cold weather effectively rebalanced 2013,” wrote Pehlivanova and Wang.
Winter temperatures averaged close to 10-year norms in aggregate for the season, and the number of heating degree days recovered by 17% from 2012 levels. However, “these statistics are deceiving” because November was colder than usual, while there were unseasonably warm temperatures in December and January. February weather was in line with historical norms. “Then came an exceptionally cold March…”
When the Energy Information Administration releases gas storage numbers on Thursday, it likely will show a withdrawal, leaving about 1.7 Tcf in the ground at the end of March, predicted the Barclays analysts. “This compares with our earlier projection for March to end with 1.9 Tcf in the ground, which assumed 10-year normal weather. The market will now head into the summer injection season with about 200 Bcf less in storage than our balances had anticipated.”
The market fundamentals suggests a higher price environment through the rest of the year, but the analysts are concerned that the current price rally may have run ahead of itself because the forecast for the supply trajectory remains unchanged from a previous review. Barclays analysts took a fresh look at the regional analysis of U.S. production conducted in early January and found that it confirmed their previous projections: domestic output was down except in “headline” onshore shale plays (see Daily GPI, Jan. 11).
“Output in the Fayetteville has essentially stabilized at 2.9 Bcf/d as of December 2012, and we maintain our expectation for a modest pullback in 2013,” said the analysts. “The Marcellus continues to grow, adding an average of 107 MMcf/d in each of the past three months. Drilling activity in the play has leveled off, and a large backlog of wells remains…Along with a significant amount of pipeline and processing capacity additions, this will support the play’s pace of output growth in 2013, in our view.”
Data on Texas oil production and Barclays’ estimate of associated gas, as well as gas output in North Dakota also is tracking earlier projections. The declines in “all other” areas of the country appear to be “steeper than we had projected,” but the numbers are distorted by well freeze-offs. “The aggregate amount of production curtailments in each month is difficult to estimate, but pipeline flow data point to peak supply losses of as much as 1.8 Bcf/d” from well freeze-offs.
As always, coal-to-gas displacement remains the balancing item for gas markets, said the analysts. “Gas demand for power during this injection season should pull back by about 1 Bcf/d with a return to normal weather and changes in nuclear and renewables, excluding coal-to-gas displacement.
“Our analysis of all other supply and demand variables, excluding gas use in power generation, suggests that balances will tighten 1.9 Bcf/d during the injection season. In contrast, inventories will need to grow on average 4.0 Bcf/d faster than last year to rebuild to 3.9 Tcf by the end of October. This means that a 5.0 Bcf/d drop in coal-to-gas displacement compared with last year will be needed to rebalance the market.”
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