Canaccord Genuity is maintaining a natural gas price forecast of $3.50/Mcf for 4Q2012, with prices gaining 50 cents in 2013 and then moving to $5.00 for the long term, analysts said Friday.
“We remain comfortable with these estimates, and note our 2013 estimate is 80 cents above the current futures strip,” said analyst John Gerdes. “Even though U.S. onshore gas well/rig productivity appears to be stabilizing, we believe gas production related to oil-directed drilling should increase from 20% of recent gas production growth to 65% in ’13. Accordingly, robust growth in associated gas supply should limit the need for an appreciably higher gas rig count and thus lowers the probability of natural gas prices materially exceeding our forecast the next few years.”
Based on a survey of publicly traded U.S. gas producers, Raymond James & Associates Inc. analysts last Tuesday said U.S. gas output wasn’t expected to decline before 2015, in part because of associated gas supply growth (see Daily GPI, Sept. 5).
“We believe the gas market has tightened from 1 Bcf/d oversupplied at year-end 2011 to 2 Bcf/d undersupplied,” Gerdes said in a note on Friday. “Should this imbalance be maintained, the year/year (y/y) storage surplus would decline 120 Bcf by Nov. 1 and storage would peak at 4,072 Bcf.” Canaccord Genuity’s Nov. 1 forecast is for 4,081 Bcf, which “embeds some conservatism relative to recent fundamentals. This we believe is internally consistent as we project gas prices to rise to $3.50 in 4Q2012, which should unwind the coal-to-gas switching experienced thus far this year.”
Gas storage entered the cooling season this year 900 Bcf above year-ago storage levels and “should enter the heating season only 275 Bcf above year-ago levels,” said Gerdes. “Our peak storage estimate is just below demonstrated working gas capacity of 4.1 Tcf. Additionally, storage capacity should increase 0.1 Tcf this year.”
With gas prices rising, “coal should claw back” some of the losses from switching, but coal still faces a decline and hydroelectric generation should fall from last year’s levels, he said. Gas-fired power generation is forecast to be up 4.5 Bcf/d this year.
In 2013 gas storage should remain “elevated by historical standards” with a return to 2011 price levels of around $4.00/Mcf, which would induce a “reversion in this year’s fuel switching gains, leading to a decline in gas-fired power demand. Further, we expect continued robust gas supply growth associated with oil-directed drilling.”
Over the long-term, Gerdes and his team are maintaining a $5.00/Mcf gas price outlook because “the marginal cost of supply outside of the Marcellus Shale likely requires a $5 price, though we admit the estimate has modest downward bias.”
The biggest risks to the Canaccord Genuity forecast, said the team, include “higher than projected oil directed-drilling activity and a further meaningful increase in U.S. gas well/rig productivity.” In 2014, based on a $5.00 gas price environment, “we expect a reversal in the remaining third of nonstructural coal-to-gas switching experienced from ’09 though ’11.”
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