Natural gas prices won’t stay as low as they have been for as long as some expect, provided the industry gets a normal 2012-2013 winter heating season and the producer and market response to cheap gas continues, ICF International Vice President Kevin Petak said during one of the firm’s regular industry briefings Tuesday.
Productive capacity, i.e., drilling rig counts, and demand are both responding to basement-level gas prices, with producers laying down rigs and consumers, particularly power generators and petrochemical facilities burning more gas, Petak said. If the upcoming winter — unlike the last one — delivers temperatures near historic norms, producers will be rewarded, he said.
Petrochemical industry demand for gas will continue to increase, he said, “and there will be some additional coal-to-gas switching that carries through this summer as the gas prices remain relatively low.”
By the end of the gas storage injection season, ICF is projecting a fill of 3.9-4 Tcf, up a little from last year’s fill thanks to increases in gas storage capacity, Petak said.
Going into next year gas supply is going to be “about the same as it was this year” thanks to stabilization of drilling activity, he said. A shift in the demand curve caused by a normal winter and incremental demand increases from the petrochemical industry will lead to rising gas prices.
“We are projecting that gas prices will firm to the $4 ballpark next winter,” he said. “We think that they will firm gradually throughout the summer. This view is generally contrary to what a lot of analysts and producers currently think about the marketplace. We don’t think $2-3 gas is sustainable. And certainly that is being borne out by the dramatic declines in drilling activity that we’ve seen over the past six months.
“We would recognize that there could be some stickiness in the marketplace over the next six months or so because, I think, most of the analysts continue to look at the working gas levels being relatively high and interpret that as a soft supply-demand balance condition and thus, think that the gas prices should be lower. But in fact, as the productive capacity is stabilizing…and demand is growing and we get the normal winter weather next year, that will lead to a dramatic increase in gas prices, and that market tightens back up.”
On Tuesday the Energy Information Administration revised downward by 21% its projection for natural gas prices this year, citing abundant storage levels and prolific production (see related story).
Petak said he’s been “amazed” that analysts have been so quick to cut their gas price forecasts, not for this year but for the following years.
“…[I]t makes sense that most of the analysts would lower their projections for this year,” he said. “What I’m amazed about is that they’re also reducing them pretty significantly for next year and for the following year, which to me…doesn’t make much sense. If you get lower gas prices this year, that should lead to an even bigger decline in drilling activity and thus, an even bigger reduction in productive capacity than what we actually project in our forecast, and thus an even bigger increase next year in gas prices.”
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