Raymond James & Associates Inc. last week raised its 4Q2012 natural gas price assumptions by 75 cents and lifted the 2013 forecast by 50 cents, predicting 1Q2013 price “spikes to near $5.00/Mcf.”
J. Marshall Adkins and his associates raised the full-year 2012 forecast to $2.82/Mcf from $2.63. The 2013 gas price forecast now is set at $3.75 from $3.25.
“U.S. natural gas prices tanked last winter due to way too much gas supply and way too little weather-related gas demand,” Adkins wrote. “Fortunately for next year, the solution to low gas prices is low gas prices. Gas supply growth has slowed and temperatures anywhere near normal this winter should lead to much higher winter-over-winter gas demand. The combination of these two factors (and a few other lesser ones) leads us to believe that U.S. natural gas prices should be much higher this winter than last winter.”
Adkins said energy investors shouldn’t assume that a winter price “surge suggests a new $5.00 U.S. natural gas paradigm” because higher winter prices also would encourage a reverse in last spring’s increase in coal-to-gas switching. “That means that we expect summer 2013 natural gas prices to retreat sharply from winter highs but still average much higher than 2012. In other words, expect much more gas price volatility in 2013.”
Over the long term, gas fundamentals should improve “gradually,” said Adkins, with prices drifting higher in 2014 and beyond. To reflect this, the 2014 gas price outlook was revised higher by 25 cents to $4.25.
A 1-2 Bcf/d swing in gas supply and demand used to be a “big deal,” he said. This past summer, the United States “set all types of these ‘big deal’ records with huge fluctuations in gas pricing as well as gas supply/demand.”
Last April began with record-high storage levels and a 900 Bcf year/year (/y/y) storage surplus, the analysts said. There also were “tough” y/y weather comps (summer 2011 had 8% more weather than the 10-year average), and roughly 3 Bcf/d more y/y gas supply. This combination of bearish fundamentals drove prompt month gas prices to below $2.00/Mcf as the most resolute gas bulls abandoned ship.”
In turn, low gas prices tested the capacity of the market’s ability to switch from coal-to-gas fired demand. Raymond James estimates that switching peaked in May “at a staggering 6.7 Bcf/d.”
Switching since has slowed in the second half of this year as gas prices have risen, and y/y switching should average higher at 4.5 Bcf/d y/y for the summer of 2012 — as defined by the April to November “gas summer,” said Adkins. Longer refueling cycles for summer nuclear outages, a drop in y/y hydroelectric generation, more gas exports to Mexico and “modestly” higher industrial demand also drove the total weather-adjusted summer/summer 2012 storage injections nearly 4 Bcf/d.
As always, weather will determine the outcome of prices and demand, said Adkins.
“Although weather is projected to be 5% lower than normal by the National Oceanographic and Atmospheric Administration, temperatures should still be considerably colder than last year due to an abnormally warm weather experienced during the 2011/2012 winter season,” wrote Adkins. “We estimate that the normalizing of weather alone could tighten the entire gas market by as much as 6 Bcf/d during this winter.” A colder winter could in turn lead to “record weekly withdrawals and a massive y/y storage deficit,” based on the 10-year norms.
Raymond James expects the gas market to be 2.7 Bcf/d tighter this winter than a year ago. If the winter forecast proves correct, the market would exit winter with 2.2 Tcf in storage, versus 2.4 Tcf last year. “Gas traders should hold on to their hats as this should be the leading driver of prices early this winter. For reference, if the market extrapolates these trends, we wouldn’t be surprised to see prices touch as high as $5/Mcf over the next six months.”
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