Mild summer temperatures have masked bullish signals for the U.S. natural gas market, with industrial demand aggressively growing and net imports dropping more steeply than expected, according to Barclays Capital. However, onshore natural gas production still is on the upswing and likely will dictate prices.

“What the end of winter took from the natural gas markets, the end of the summer returned,” said analysts Biliana Pehlivanova and Shiyang Wang last week. “After a chilly March slimmed inventories at the start of the injection season, an exceptionally mild August allowed them to swell rapidly.” End of story? No, according to the analysts.

“Strong industrial consumption and declining net imports have set balances on a tightening trajectory, but it is the trajectory of production that is likely to dictate the direction of prices,” said the duo.

“Production trends are contributing to bearish sentiments.” Barclays models had indicated that domestic gas production growth showed output slowing drastically and tipping into declines in the second half of this year (see related story; NGI, Jan. 14).

“Production growth has slowed, but there are now signs that it may not tip into declines as we had anticipated.” The four natural gas growth areas onshore, as Barclays defines them, are the Marcellus/Utica, Fayetteville and Bakken shales, as well as parts of Texas, which “are outperforming expectations…”

Barclays expects U.S natural gas prices to recover later this year and average $3.73/MMBtu in 2013. In 2014, growing production should be enough to offset increased industrial demand and a continued decline in net imports. However, “upside risks to prices remain capped by the necessity to displace sizable amounts of coal in power generation.”

Barclays revised its 2014 price estimate to $3.88/MMBtu. The same market dynamics should persist into 2015, but coal-fired power plant retirements and the start-up of the first U.S. gas exports should help prices to recover to an average of $4.15/MMBtu, said analysts.

Marcellus/Utica gas production now is forecast to “grow by 3.6 Bcf/d in 2013,” versus a previous projection of 3.0 Bcf/d, and should grow by 3.3 Bcf/d in 2014, said analysts. A “modest slowdown” was expected in the Fayetteville, but the biggest producer, Southwestern Energy Co., “recently announced plans to ramp up operations, and growth could accelerate later this year and next.” Meanwhile, associated gas output from Texas and North Dakota oil wells is trending in line with earlier projections.

Weather-related curtailments in each month of the 2012-2013 winter have rendered some production numbers unreliable, according to Barclays, which is looking to upcoming U.S. Energy Information Administration production reports for more clarity.

“Uncertain declines in other regions notwithstanding, the strength of production in the four growth areas suggests that production growth is likely to persist this year and accelerate in 2014. We raise our Lower 48 dry gas production estimates to 65.5 Bcf/d in 2013 and 66.7 Bcf/d in 2014,” which implies average growth this year of 0.7 Bcf/d — more than double a previous forecast of 0.3 Bcf — and average growth of 1.2 Bcf/d in 2014, six times more than Barclays had projected.

Gas use by the industrial sector over the first six months of this year (1H2013) is exceeding year-ago levels by an average of 760 MMcf/d, said analysts. The pace of industrial growth “is likely to remain above our previous predictions…We expect industrial demand to grow by 580 MMcf/d in 2013 and 500 MMcf/d in 2014.”

Meanwhile, gas pipeline and liquefied natural gas (LNG) imports have dropped sharply and should maintain that trend, analysts believe. Gas imports from Canada were down more than 700 MMcf/d in 1H2013 and are “very likely to undershoot our earlier projections.” However, declining Canada output “is only partly the culprit. In fact, there are indications that Canadian production may be gaining some ground.

“However, strong production growth in the U.S. Northeast is redrawing the regional landscape of U.S. gas markets and displacing Canadian gas.”

Pipeline flows have shifted to the point that the Northeast was a net exporter to Canada in May, analysts noted. Production growth from the Marcellus and the Utica shales is expected to persist into the foreseeable future, forcing Canada imports down even more.

On those expectations, Barclays revised its outlook for net Canada imports this year to an average of 4.7 Bcf/d from 5.1 Bcf/d. The 2014 projection was maintained at 4.4 Bcf/d. “Combined, net pipeline and LNG imports in the U.S. are down 1.2 Bcf/d in 1H2013; we expect this weakness to persist through the rest of the year.”