Goldman Sachs on Friday joined two other analyst houses in boosting U.S. natural gas price forecasts, recommending that investors position themselves for “higher prices over the course of 2013.” The gas rig count also is predicted to surpass the 500 mark by the end of the year.
New York Mercantile Exchange (Nymex) gas prices now are forecast to average $4.40/MMBtu for the rest of 2013, up from a previous prediction of $3.75, Goldman analysts said in a note. “In particular, we now expect prices to average $4.50/MMBtu over the second half of this year, as a return to growing production is required to balance the market after this summer, in our view.”
Over the medium-to-long term, Goldman is forecasting equilibrium prices in the $4.00 to $4.50 range, and “we now expect prices will need to average $4.50/MMBtu in the second half of 2013 to bring on the production growth required to balance the market…Accordingly, as current 3Q2013 prices average $4.01/MMBtu and 4Q2013 prices average $4.13/MMBtu, we recommend positioning for higher prices over the course of 2013.”
Specifically, Goldman recommends buying $4.20/MMBtu call options on November 2013 Nymex natural gas, with a current value of 31 cents.
The forecast follows those of Barclays Capital and Stephen Smith Energy Associates, which over the past few days have raised their predictions for U.S. gas prices. Barclays sees gas prices averaging $4.00/MMBtu in 2Q2013 and 3Q2013, and $4.10 in the final period (see Daily GPI, April 4). Smith predicts Henry Hub prices will average $3.90/MMBtu in 2013, with $4.00/MMBtu in 2Q2013, climbing to $4.10 in 3Q2013 and $4.15 in 4Q2013 (see Daily GPI, April 5).
Like those analysts, Goldman’s team said colder March weather helped to turn the tide.
“The cold weather in March means the 2012/13 winter will end up in line with historical averages, despite the mild weather in December. Combined with the ongoing tightening shift in the underlying supply/demand balance resulting from structural demand growth against stable production, this means there was less than 1.7 Tcf of natural gas in storage by the end of March this year, compared to close to 2.5 Tcf last year.
“As a result, we now estimate only 2.0 Bcf/d of coal-to-gas switching will be required on average this year to reach a storage level by the end of the summer of around 3.65 Tcf, which will allow prices to continue to recover over the course of this year.”
There is a risk to 2Q2013 prices from declining gas production and coal-to-gas switching “is still needed to balance the market,” said Goldman. However, in the second half of this year, “we believe the need for more production and less need for coal-to-gas switching will allow prices to move higher.”
Production growth from “relatively price-insensitive sources” like the Marcellus Shale and associated gas are continuing, but “the momentum has likely peaked as rigs have dropped even in the Marcellus, and liquids-rich gas and oil drilling has stabilized, and natural gas liquids prices have been under pressure over the past year.”
The Marcellus natural gas production and U.S. oil production “in general face infrastructure constraints that will likely continue to limit the pace of growth in coming years. Further, given the underlying declines in conventional production, dry shale gas plays like the Haynesville are key for future natural gas production growth.”
Specifically, said the analysts, Haynesville Shale output is in meaningful decline, which has to be reversed. Encana Corp.’s decision in February to increase its Haynesville rig count to five from three this year (see Daily GPI, Feb. 15) had “seemed early to us given where prices were at the time, [but] similar measures by other producers are needed.
“So far most producers have been very reluctant to increase gas- directed drilling, but with the March rally this could start to change. Specifically, we assume the U.S gas rig count rises back above 500 by the end of 2013 and above 600 by the end of 2014, from below 400 currently.”
That forecast is at odds with Barclays, which late last month predicted that the gas rig count would remain below the 450 mark this year (see Daily GPI, April 1).
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