Analysts at Goldman Sachs said Wednesday they expect natural gas prices will remain low this summer, but recommended buying longer-dated natural gas futures on the presumption that slower production, a declining rig count and a return to normal winter weather would boost prices in 2013.

The investment banking and securities firm said last winter’s unseasonably warm weather — which it dubbed as “the winter that wasn’t” — had led to a record storage overhang of 2.48 Tcf, and said power generators would need to undertake unprecedented coal-to-gas switching to avoid a breach.

“We now see a need for an unprecedented 4.9 Bcf/d of coal-to-gas substitution on average in 2012, up from our previous estimate of 3.4 Bcf/d,” analysts David Greely, Johan Spetz, Jeffrey Currie and Samantha Dart said. “This includes several hundred MMcf/d of marginal substitution against PRB [Powder River Basin] coal. Over the course of the year, we expect the switching to peak at around 7.0 Bcf/d in periods of lower overall power demand, and be lower in the summer peak-demand months, when many gas-fired plants will be running anyway.”

In response to the storage issue, Goldman said it was lowering its Nymex natural gas price forecast for 2Q2012 and 3Q2012 to $2.10/MMBtu (down from $2.90/MMBtu and $2.75/MMBtu), its average price forecast for 2012 to $2.40/MMBtu (down from $3.10/MMBtu) and its average price forecast for 2013 to $4.00/MMBtu (down from $4.25/MMBtu).

But they added prices could rise to $4.00/MMBtu “relatively quickly if the need for switching is reduced to around 2.5 Bcf/d, which we expect will be the case in 2013.”

Goldman said that while recent immediate curtailments in natural gas production — mainly from shale plays — totaled about 0.9 Bcf/d, they predicted that declining rig counts would have a larger impact on natural gas prices in 2013.

“Gas-directed rigs are now declining rapidly,” the 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 natural gas wells, coupled with oil wells, would increase overall dry gas production in the United States by 2.3 Bcf/d y/y in 2012, and by 1.1 Bcf/d y/y in 2013.

On the issue of liquefied natural gas (LNG) exports, Goldman said it expected the Sabine Pass Liquefaction LLC proposal to move to fruition (Daily GPI, May 23, 2011).

“While we expect Sabine Pass will get the full go-ahead from the government to start exporting LNG, we think other projects will find it more difficult, as the [Department of Energy] appears increasingly concerned with the impacts on the domestic price of natural gas, and the political debate around energy security and affordability is likely to heat up going forward,” the analysts said.

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