The U.S. natural gas markets likely face demand growth of more than 14 Bcf/d between now and 2020, and while there appears to a surplus of gas still in the ground, demand may be capped by operators’ ability to deliver supply, Barclays Capital analysts said Monday.
Combining all of the domestic gas demand foreseen by the end of the decade is going to require a magnitude of growth that “opens the door for the bulls to tout hefty, longer-term price forecasts,” said analysts Biliana Pehlivanova and Shiyang Wang. With the “right price signals, producers stand ready to quell the heated demand with a tidal wave of output. In the past five years, natural gas production has grown by an average of 2.64 Bcf/d each year, with cash prices averaging $4.80/MMBtu.”
The latest price moves above $4.00/MMBtu didn’t draw more rigs to gas drilling targets and since the start of the year, gas-directed drilling has continued to moderate, said the duo. However, as each month passes, it’s becoming more clear that a “large wave” of gas demand caused by “tectonic shifts” is about to unfold.
“Demand growth is now taking the leading role for natural gas markets, and we believe it will carry prices higher in the next few years. We believe prices would have to rise from current levels for production growth to meet an average annual incremental consumption of 2 Bcf/d in the next seven years.”
Prices at $4.50-5.00/MMBtu “are high enough to motivate enough gas drilling to meet projected demand: a healthy recovery from recent $2.00 prices, but still low enough to preserve a cost advantage in the U.S. relative to other manufacturing economies. We expect natural gas prices to average $4.35/MMBtu in 2015, and $4.75/MMBtu in the longer run.”
Cash prices aren’t the “perfect indicator of what producers receive for their gas” because many hedged more than 30% of current annual output and more than 15% of the following year’s output,” said analysts. “Also, the economics of most U.S. locations drilled in the past few years in part were underpinned by liquids prices, they said. There also is a lot of excess gas supply from associated gas in oilfields.
“Importantly, by far the largest source of production growth in recent years has come from the Marcellus Shale, which offers among the lowest cost gas in the nation, and remains profitable in the current price environment. Still, gas prices matter, and if production has to grow to meet increasing consumption, prices would have to rise to entice a producer response.”
The huge shifts in domestic gas supply-demand have been well illustrated, with a lot of press going to the big U.S. natural gas export projects. Analysts also see a lot of demand growth through the end of the decade tied to several other factors, some big, some small:
Barclays’ price forecast suggests that gas will remain decoupled from oil for the foreseeable future. “Yet, oil prices do matter for the gas markets…While U.S. gas prices have won independence from their older oil sibling with the success of shale gas, the two remain close relatives at heart.”
Drillers often drill for both gas and oil, and investment decisions put the two commodities in competition for drilling dollars.
“An increased availability of oil drilling targets has already pulled rigs away from natural gas plays,” said analysts. “A discovery of new and even larger shale oil resources could siphon more rigs away from natural gas, even at higher gas prices. On the contrary, a collapse of oil prices could make natural gas drilling targets more attractive, even if gas prices remain unchanged.”
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