A consensus is forming among U.S. government and private energy analysts that barring an unusual weather event — or an unusual event period — North American natural gas prices likely will be low through the summer. Some have thrown in the towel for higher prices through the summer and fall, and instead are looking ahead to what they hope will be a return to normal winter weather that could boost prices beginning in 2013.

The U.S. Energy Information Administration last week revised downward by 21% its projection for gas prices this year, citing abundant storage levels and prolific production. In its Short-Term Energy Outlook for April released Tuesday, the agency said 2012 gas prices likely will average $2.51/MMBtu, down from a March projection of $3.17/MMBtu (see NGI, March 12). Natural gas spot prices averaged $2.18/MMBtu at the Henry Hub in March, the lowest average month price since April 1999, EIA noted.

The weak gas prices were largely due to the growth in total marketed production last year, which rose by an estimated 4.8 Bcf/d (7.9%), the largest year/year (y/y) volumetric increase in history, EIA said. “This strong growth was driven in large part by increases in shale production.” The y/y output should continue through the year, “much lower rate than in 2011 as low prices reduce new drilling plans.” Total marketed production is seen averaging 69.22 Bcf/d this year, up 3 Bcf/d from 2011.

Thanks to a warmer-than-usual winter and continuing strong shale development, gas storage is bulging at the seams. At the end of March, the official close of the winter heating season, working inventories totaled 2,479 Bcf, 887 Bcf more than last year’s level and 934 Bcf above the five-year average. In the last two decades, end-of-March inventories have not risen over 1,700 Bcf, and prior to that, rose above 2,100 Bcf only once, in 1983, EIA said. Given the current inventory state, EIA expects gas storage levels at the end of October to set a new record high as well.

Natural gas demand this year is expected to be fueled primarily by power generation, according to EIA. Gas consumption is predicted to average 69.6 Bcf/d, up 2.8 Bcf (4.2%) from 2011, and then climb to 70.54 Bcf/d in 2013. While it is projecting declines in residential and commercial gas use, gas consumption in the electric power sector is seen growing by about 16% this year — accounting for an average of 24.15 Bcf/d of total gas demand — due to the cost advantages of natural gas.

“Consumption in the electric power sector peaks in the third quarter…at 30.6 Bcf/d, when electricity demand for air conditioning is highest. This compares with 27.7 Bcf/d in the third quarter of 2011.” Next year, when closer-to-normal temperatures are predicted, EIA projects that gas demand in the residential, commercial and industrial sectors will rise, while there will be a “3.4% decline in power sector natural gas burn.”

Pipeline gross imports may fall by 0.7 Bcf/d (7.2%) this year as domestic supply displaces Canadian sources; pipeline gross exports grew by 1 Bcf/d last year driven by increased exports to Mexico, according to EIA. The gross exports “are expected to continue to grow, at a slower rate, in 2012 and 2013,” the agency said.

Expanding shale supplies in the United States will continue to take their toll on liquefied natural gas (LNG) imports. The EIA estimates that LNG imports will fall by 0.3 Bcf/d (28%) this year. It expects that an average of about 0.7 Bcf/d will arrive in the United States this year and in 2013 (mainly at the Everett LNG terminal in New England and the Elba Island terminal in Georgia), either to fulfill long-term contract obligations or to take advantage of temporarily high local prices due to cold snaps and disruptions.

In a note to clients Goldman Sachs analysts said last winter’s unseasonably warm weather helped to create a record storage overhang of 2.48 Tcf, and power generators needed to undertake unprecedented coal-to-gas switching to avoid a breach. They slashed their New York Mercantile gas price forecast from 2Q2012 through 3Q2012 to $2.10/MMBtu, from a previous forecast of $2.90 in 2Q2012 and $2.75 in 3Q2012. Average gas prices for 2012 now are set at $2.40/MMBtu from $3.10, and in 2013, prices are expected to average $4.00, down from a previous estimate of $4.25.

However, the price of gas could hit $4.00 “relatively quickly if the need for switching is reduced to around 2.5 Bcf/d, which we expect will be the case in 2013,” said the Goldman team.

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, said ICF International Vice President Kevin Petak. Gas producers may be rewarded if the upcoming winter delivers temperatures near historic norms, he said during an industry briefing last week.

“We are projecting that gas prices will firm to the $4 ballpark next winter,” Petak 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.”

Meanwhile, Petak said ICF was projecting a fill of 3.9-4 Tcf by the end of the gas storage season, a slight increase from last year. “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,” he said.

Some gas producers recent decisions to curtail gas output from onshore plays totals about 0.9 Bcf/d, according to Goldman. Declining rig counts likely would have a larger impact on prices next year, said analysts.

“Gas-directed rigs are now declining rapidly,” analysts said. “However, the resulting decline in natural gas production growth is being offset in part by an increase in gas production associated with the crude oil production and the oily shale plays to which rigs are being diverted.” They predicted unconventional and conventional gas wells, coupled with oil wells, would increase overall dry gas production in the United States by 2.3 Bcf/d year/year (y/y) this year, and by 1.1 Bcf/d y/y in 2013.

Given the continued weak outlook for domestic gas, explorers with exposure to high rates of return (ROR) in liquids-focused plays, both in the onshore, as well as the shallow waters of Gulf of Mexico’s Outer Continental Shelf, provide the best upside going forward, the energy team at Credit Suisse said Friday. The favored exploration and production (E&P) companies also need to have “capital flexibility and liquidity to fund development in the volatile commodity price environment.”

Onshore plays with liquids exposure and high ROR are the “super rich” Marcellus Shale, along with the Eagle Ford and “potentially” the Utica shales, said the analysts.

Credit Suisse also reduced its gas price forecasts for 2015 and beyond, and analysts adjusted their net asset value (NAV) and earnings per share (EPS) prices for 1Q2012, “reflecting the Global Commodities team’s forecast revisions,” which were announced on Friday. The long-term natural gas price forecast was cut by $1.00/MMBtu to $4.50 from $5.50, while interim oil price forecasts were increased. The firm maintained its long-term Brent and West Texas Intermediate (WTI) oil forecasts at $90/bbl and $84/bbl, respectively.

For the first three months of 2012, Credit Suisse said its marking-to-market gas prices were reduced to an average of $2.77/MMBtu from a previous estimate of $3.20/MMBtu. WTI oil prices were increased to $102.85/bbl from $90.

“Following the increase in our near- and medium-term oil prices, lowered natural gas price forecasts and recent company updates, our 2012 and 2013 EPS estimates increase by 9% and 11%, respectively. Relative to consensus, we are 22% above the Street in 2012 and 50% above in 2013.” The NAVs for gas-focused producers are expected to fall 8% under Credit Suisse’s revised commodity price forecast, while the NAV for oil-focused E&Ps would increase by 1%.

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