Raymond James & Associates Inc. analysts joined their peers at Tudor, Pickering, Holt & Co. Inc. (TPH) and Morgan Stanley in predicting higher natural gas prices for this year.
The analysts join Goldman Sachs, Barclays Capital and Stephen Smith Energy Associates, which last week predicted higher prices in 2013 (see Daily GPI, April 8, April 5; April 4). The reasons cited by Raymond James and TPH basically are the same: there was a cold end to winter and the Energy Information Administration Form 914 data indicates declining production.
“While Punxsutawney Phil’s prognostication for an early end of winter was wrong and we saw gas prices increase, the colder winter ending weather has made us more bullish on gas prices for 2013, thus we are raising our 2013 gas price forecast by 60 cents from $3.25/Mcf to $3.85/Mcf,” wrote Raymond James analysts led by J. Marshall Adkins.
“While we are raising our 2013 numbers, this is still slightly below the strip as we believe higher winter prices will encourage a reversal in the coal-to-gas switching through spring 2013. Thus, we expect summer 2013 natural gas prices to strengthen as the market struggles to refill gas storage this summer.”
In the longer term, “gas fundamentals should continue to be relatively tight as cheap U.S. natural gas prices encourage solid demand growth but low-cost shale gas allows the 2014 gas price to balance the supply and demand at $4.00/Mcf. This represents a 25 cent increase from our prior forecast. Longer term, we remain convinced that both U.S. gas demand and U.S. gas supply can grow profitably at a $4.25/Mcf gas price.”
Adkins and his colleagues said from a gas storage perspective, “we think that summer 2013 U.S. gas prices will need to remain high enough to encourage a substantially looser year/year (y/y) 2013 summer gas supply/demand equation. That means 2013 gas prices must stay high enough to either reduce y/y demand and/or increase y/y gas supply from winter levels.
“Accordingly, we now think that an average gas price of $4.00/Mcf-plus for the next three quarters will be necessary to reverse from the winter heating season tightness (of around 2 Bcf/d undersupplied) to a much looser (or 2.6 Bcf/d oversupplied) gas supply/demand situation during summer injection season…”
TPH analysts noted in their review that U.S. weather was 6% colder than normal in 1Q2013, with the brunt of it coming in late March. As important, it was an “impressive 28% colder” than in 1Q2012.
“The cumulative storage draw during 1Q2013 was 1,830 Bcf versus 1,430 Bcf 10-year norm and a paltry 1,020 Bcf a year ago,” said the TPH team. “In fact, the 1Q2013 draw was the largest during the last 10 years.”
The TPH analysis “suggests that 215 Bcf of the 400 Bcf excess draw versus normal (1,830 Bcf less 1,430 Bcf) is explained by colder temps, which leaves another 185 Bcf draw to be explained by improving supply and demand fundamentals relative to 10-year norms,” which in turn implies a 1-2 Bcf/d “undersupplied gas market heading into summer injection season.
The last two heavy storage draws obviously had an impact on production forecasts, but some market-watchers suggested there also could be some other factors at work in the storage draw-down. In addition to the colder weather, some of the large draw could be blamed on storage mechanics and the deadlines for customers to withdraw all of the past year’s gas in the near future, so this year’s fills can begin. Also, customers likely paid less than current prices over the past year for the gas in storage and used up their cheaper storage gas on the last winter blast, betting that the market would go lower as it gets further into the shoulder months.
Just last week, the year-on-five-year average gas in storage, which has been in a significant surplus situation for quite some time, slipped into a deficit. For the week ending March 29 the EIA reported inventories are now 37 Bcf below the five-year average of 1,724 Bcf.
“The gas market was not exposed to $4.00/Mcf for much of 1Q2013 so it is difficult to extrapolate this large undersupply for the rest of the summer.”
If the gas market were to remain undersupplied by 1 Bcf/d for the 200 days of injection season, then storage would end at 200 Bcf less than normal, or 3.6 Tcf, noted TPH.
“This would keep gas prices $4.00/Mcf for the summer in order to entice exploration and production (E&P) companies to bring more gas-directed rigs back into service (already our base case for late 2013 and 2014). Even if the gas market is balanced this summer, 3.8 Tcf is not scary as long as production is flat/declining. This is our base case.”
Because of the cold end to winter and lower ending storage, a $4.50/Mcf summer gas scenario is “back on the table,” said the TPH analysts. “Is it possible? Certainly.” Energy Information Administration-914 data production indicates output is “flat/declining, which puts an upward bias on gas price, plus a production response from rig count increase lags six months. This is not our base case but we recognize that hot/tropical weather could enable this scenario.
“However, rising gas prices this summer would likely provide E&P companies with an opportunity to hedge 2014 gas prices at similar levels ($4.50-plus/Mcf), which would increase the chance of an over-correcting supply response.
“If gas prices rise this summer above current levels, we will become more nervous about 2014 fundamentals. Electricity fundamentals would also suggest that sustained $4.50/Mcf gas through the summer is unlikely as Central Appalachian coal becomes in the money.”
If there were a mild summer, a $3.50/Mcf gas price would be possible “but we believe it would be short-lived.”
Morgan Stanley on Monday also lifted its New York Mercantile Exchange gas base-case price by 7% to $3.93/MMBtu from $3.66, which was set just two weeks ago. The updated 2013 bull-case price forecast is $4.11/MMBtu and the revised bear-case view is $3.59.
“Better demand trends have taken our end-March inventory estimate down from just under 1.9 Tcf a month ago to just under 1.7 Tcf today,” said Morgan Stanley’s Adam Longson and Tai Liu in a note.
More normalized end-of-March storage numbers have reduced the market’s reliance on coal-to-gas substitution in the power sector to balance the market, said the duo.
In addition, gas demand will be lifted in the months ahead, they said, by the prospects of lower hydro output in the Northwest, the expectation that at least one San Onfre nuclear unit in California will remain offline this summer, more gas exports to Mexico and additional gas-based power generation capacity.
“As a result, summer gas prices will not need to trade at an artificially depressed level in order to stimulate price-sensitive demand in the power sector,” said the Morgan Stanley team.
Longson and Liu said they “see gas prices above $4.00/MMBtu for much of the rest of the year, with the potential for July prices to reach $4.50/MMBtu in our bull case.”
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