U.S. natural gas prices for 2013 will be lower than predicted in late October because winter weather so far has been missing in action, Raymond James & Associates’ energy team said this week. Analysts with Goldman Sachs also have reduced their price forecast but said they remain bullish on the market.
Raymond James energy analysts J. Marshall Adkins, Pavel Molchanov and research associate Aryan Barto revised the firm’s full-year price outlook to $3.25/Mcf from $3.75 based on “extremely easy weather comps.” In late October the analysts had expected a “brief” uptick in domestic prices early this year (see Shale Daily, Oct. 30, 2012). The respite was expected to last until the beginning of summer.
Domestic natural gas supply models also are indicating core growth of 1.2 Bcf/d this year, well above consensus estimates, according to the Raymond James team.
“Warm winter weather is not helping U.S. gas prices,” the analysts said. “At the start of 2012, our $3.25/Mcf gas forecast was a whopping 28% below consensus. We were not low enough as the full-year average came in at $2.79. The combination of huge U.S. gas supply growth and a remarkably warm winter helped push U.S. natural gas prices to lows near the $2.00 level.
“For 2013, we envision a generally less bleak gas scenario. In fact, coming into this winter, we raised our 2013 forecast to $3.75 on the assumption that a ‘normal’ winter and slowing U.S. gas supply growth would begin to correct the bloated natural gas inventories.” The prospect for “normal” winter weather “now looks very distant…” However, “a $3.25 average in 2013 would still be about 45 cents higher than 2012.”
A winter price rally could make an appearance before the end of February, but Raymond James adjusted its first and second quarter price deck by 75 cents. If the revised forecast proves correct, summer-ending storage (Nov. 1, 2013) is predicted to be about 4.0 Tcf, or basically flat with 2012.
“With December in the books, we have actually experienced 13% less weather year/year (y/y) so far in the winter season,” said Adkins and his colleagues. “That means…we experienced one of the warmest Decembers on record, for a second consecutive year! Al Gore…we should have never doubted you.
“This has brought natural gas prices back into the current $3.30/Mcf range, down from the nearly $4.00/Mcf highs seen in late November.” Gas prices still need to drop to around $3.00/Mcf through this summer to avoid “over-filling” gas storage for next winter. The lack of cold weather was the “key differentiating factor” from the October models, but analysts see two more key contributors: lower assumptions for reverse coal-to-gas switching as gas prices are more competitive; and core U.S. supply growth of 1.2 Bcf/d in 2013.
Raymond James analysts now are modeling 1.6 Bcf/d of reverse coal-to-gas switching from a previous estimate of 2.1 Bcf/d based on the lower price deck assumptions. The United States averaged 4 Bcf/d of coal-to-gas switching in 2012.
“Of course, not all of what was switched last year will be able to be ‘un-switched,’ given retirements of coal plants and regional logistics. Still, we believe this should help prompt summer gas prices to retreat helping to moderate gas-fired demand switching back to coal.”
Core U.S. gas supply growth in 2013 is modeled at 1.2 Bcf/d, which is “not a typo,” they said. “This nonconsensus view is driven by continued associated gas supply growth from oil wells, a reversal of price-related shut-ins early 2012, no Hurricane Isaac production delays, and additional Marcellus [shale] takeaway capacity coming on-line late 2013.”
Other factors that may factor into prices this year are “an increase in demand (finally) from the industrial sector (0.75 Bcf/d more y/y); and less supply from Canadian imports as Henry Hub and AECO gas prices “are now more comparable.”
Jumping to 2014, the gas market should continue to gradually improve, said analysts. Continued domestic gas supply growth, even with fewer active rigs, as well as the remaining coal-to-gas switching “will be nearly equally offset” by several things.
A return to “normal” winter weather is expected in 2013-2014, which would cut 0.5 Bcf/d from supplies “although we have only two months in the books.” In 2014, higher overall power burn and increased industrial demand are predicted to take advantage of cheap gas prices. Also, fewer gas imports from Canada and more exports to Mexico are expected.
“We are also initiating a 2014 gas price forecast of $3.75/Mcf as [those] factors should drive a higher average natural gas price versus 2013. Longer term, we see gas fundamentals continuing to gradually improve (especially if/when liquefied natural gas exports kick in) and natural gas prices should continue to drift higher in 2015 and beyond. To reflect this, we are maintaining our long-term gas price forecast of $4.25/Mcf.”
Goldman Sachs’ quartet of analysts — Johan Spetz, Jeffrey Currie, Samantha Dart and Stefan Wieler — have cut their previous 2013 New York Mercantile Exchange gas price forecast to $3.75/Mcf from $4.25, but they maintain a “bullish outlook relative to the current market price of $3.50…as recent temperature forecast revisions for January make it less likely that cold weather in 1Q2013 will compensate” for December.
A slower return of rigs to dry gas production areas “will have a relatively small impact on production in 2013, but a more meaningful impact in 2014,” wrote Spetz and his colleagues. “Net, we now expect 2.4 Bcf/d of coal-to-gas switching will be needed on average in 2013 to reach comfortable inventory levels of 3.85 Tcf by the end of summer, up from 2.1 Bcf/d” that they had previously forecast.
“Specifically, we expect the impact on natural gas output from a slower natural gas rig count recovery to be small in 2013 owing to the lag between drilling and production, and high-grading (increased productivity of individual wells as the overall number of wells drilled drops, as observed for example in the Barnett),” wrote the Goldman team.
“In the Haynesville Shale for example, we estimate that if rig counts stay flat at current levels around 35 for the next two years instead of increasing gradually back above 60 rigs by the end of 2014, that only shaves off 0.1-0.2 Bcf/d of production on average in 2013. Importantly, however, the impact on production levels becomes more meaningful in 2014.”
For U.S. oil prices, Raymond James’ original 2012 West Texas Intermediate (WTI) forecast of $92.50/bbl was “slightly below” the full-year average of $94/bbl, while the original Brent forecast was $100/bbl versus an average for the year of $109.
“All in all, we are surprised at just how well oil prices held up, especially in the second half. Amid the European debt mess, dysfunction in Washington, and China’s slowdown, it could have been far worse. Offsetting these negatives was nonstop volatility in the Middle East, plus the powerful surge of monetary stimulus from most central banks.
“For 2013, our view on oil prices remains decidedly bearish. While we are bumping up our Brent forecast slightly from $80 to $85, we are leaving WTI at $65. Both of our oil price forecasts remain more than 20% below consensus.”
Following a mixed 2012, the Raymond James team doesn’t expect “big” energy stock gains this year.
“Given the gas price meltdown and nonstop oil volatility, most energy stocks underperformed in 2012 for the second straight year. In the context of our below-consensus forecasts for both oil and gas, in total we are entering 2013 with the lowest proportion of buy-rated stocks in the past decade. The market’s jittery, risk-averse sentiment again underscores the importance of selectivity.”
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