Because natural gas demand still is being hurt by weak U.S. gross domestic product (GDP) growth, industrial output and “uncommonly warm weather,” Deutsche Bank on Friday reduced its gas price forecast for the second time in less than a month.
The 2012 forecast, which now is set at $3.50/Mcf for 2012, follows the bank’s prior estimate in early December of $4.25 (see Daily GPI, Dec. 5, 2011). Forecasts also were reduced for 2013-2015.
“We believe that the longer-term fundamental picture in U.S. natural gas favors firmer prices,” said the analysts, led by Adam Sieminski. “In the medium-term, we believe that U.S. gas is supported by coal competition at about $3.50-4.00/MMBtu. Proposed U.S. Environmental Protection Agency (EPA) regulations on power plant emissions could raise this floor, but EPA is struggling to get these rules implemented.
“Near-term, however, the gas markets face difficulty. Start-of-winter storage peaked at the relatively high level of 3,852 Bcf, with [supply-demand] balances pointing to an end-of-winter bottom near a record high 1,975 Bcf. This will tend to stifle rallies and encourage sell-offs.”
The Energy Information Administration on Thursday said gas forward market prices signal continuing low gas prices through 2012 (see related story). The outlook is shared by Raymond James & Associates Inc., which cut its outlook for 2012 U.S. gas prices on Tuesday to $3.25/Mcf, its fourth cut to the price forecast since last July (see Daily GPI, Jan. 4; Dec. 6, 2011; Oct. 17, 2011; July 6, 2011).
Last September the Deutsche U.S. economics team reduced its second-half 2011 and full-year 2012 forecasts because real GDP had been revised significantly lower and financial conditions had tightened dramatically because of a combination of the U.S. government ratings downgrade and a worsening in the European sovereign debt crisis.
“However, [the bank’s economics team] argued the underlying fundamentals did not call for recession, and this remains the case, notwithstanding Europe,” said Sieminski. “Indeed, second-half growth prospects are shaping up to be much better than what appeared to be the case last quarter as current quarter growth appears on track to rise at least 3%.”
Industrial gas consumption is expected to increase as factory production recovers this year “in response to the stronger consumer demand already being seen,” the Deutsche analyst said. “The economy-wide inventory-to-sales ratio is up only 0.8% from its all-time low. Electric utility consumption of natural gas should pick up some market share as lower natural gas prices relative to coal encourage switching to natural gas for baseload electric power generation.”
Beyond the impact that weather could have on both residential and electric utility use, “the most likely potential for some improvement in the demand outlook is in industrial use — and will depend on the extent to which factory output responds to what we believe is relatively positive spending data.”
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