Standard & Poor’s Ratings Services (S&P) has revised its natural gas pricing assumptions downward for 2012 and 2013 and added its oil and natural gas price assumptions for 2014.
S&P’s assumed Henry Hub gas price average for 2012 is now $3.75/MMBtu, down from $4.00/MMBtu. For 2013 the gas price is $4.00/MMBtu, down from $4.50/MMBtu. And for 2014 S&P initiated a gas price assumption of $4.50/MMBtu. For this year the assumption of $3.75/MMBtu is unchanged.
“The lower price deck for natural gas reflects our view that an abundant supply will likely constrain prices further,” said S&P credit analyst Thomas Watters.
Drilling and completion technology has improved at a very fast pace over the past several years, and there are no signs that it will slow down anytime soon, S&P said.
“Despite the nearly 50% drop in natural gas-directed rigs since mid-2008, producers have been extracting increasing amounts of gas from U.S. fields as a result of longer lateral drilling, deeper wells, and improved fracture stimulation techniques,” the firm said. “Producers are also becoming more knowledgeable about the geology in which they operate, allowing them to drill and complete wells faster. Adding to the supply glut are numerous drilled but uncompleted wells, especially in the dry gas Haynesville basin where the lease terms require that producers drill just to hold acreage.”
Demand for gas remains bearish, the firm said. “…[R]ecession fears have increased, posing the greatest risk to demand from economically sensitive industrial and commercial users, which represent about half of gas demand.”
S&P revised its price assumption for Brent oil upward to better reflect the expectation that the Brent-West Texas Intermediate (WTI) price differential will remain at least until 2014. For 2012 the assumption for WTI is $80/bbl and for Brent, $90/bbl, up from $80/bbl and $85/bbl, respectively. For 2013 the assumption is $70/bbl for WTI and $80/bbl for Brent, which is unchanged from the previous WTI assumption and an increase from $75/bbl for Brent. For 2014 the assumption is $70/bbl for WTI and $75/bbl for Brent. For this year the assumption is unchanged at $80/bbl for WTI and $90/bbl for Brent.
“The price of Brent, in particular, which is more reflective of global supply and demand, remains strong because of Middle East turmoil, the weak U.S. dollar, loss of Libyan production, and healthy demand, particularly from Asia,” S&P said. “Meanwhile, the price differential between Brent and WTI has widened as a result of the continued surplus at Cushing, OK. This surplus stems from the development of oil-rich resources in the Bakken oil shale in North Dakota and the Permian Basin in Texas, and from Canadian crude imports.”
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