Fitch Ratings last week raised its U.S. natural gas price deck because even though there has been a shift to liquids targets by exploration and production (E&P) companies, there are slightly better gas fundamentals.

The domestic gas base-case price deck for Henry Hub now is $3.75/Mcf for 2013, but Fitch maintained its long-term gas prices at $4.50/Mcf.

“The uptick reflects a moderate improvement in prompt natural gas market conditions, created by the combination of increased demand (primarily residential and commercial), and a plateauing of gas production,” said analysts.

The “modestly improved fundamentals” are being driven by a “more normal 2012-2013 heating season demand relative to the previous year,” said the Fitch team, which has resulted in gas storage levels that are in the “middle range of their five-year averages,” based on U.S. Energy Information Administration (EIA) data.

Fitch noted that the total U.S. rig count has “stabilized” at about 1,750, but the gas rig count “continues a long-term trend of drifting downward due to price-driven weakness. As of mid-July, it now stands at just 369 rigs in the U.S., versus 518 in 2012 and above 900 rigs in 2011…”

However, even with the slight improvement in prices, “forward prices remain weak until at least 2016-2018, reflecting ongoing oversupply from shale gas production and a lack of visibility on major new sources of demand, such as new liquid natural gas and chemicals facilities.”Drilling technology innovations, analysts said, “continue to drive down production costs in the U.S., increasing gas supply at relatively low prices.”

Analysts at Simmons & Company International believe domestic demand for natural gas could show a meaningful upturn beginning as early as 2015. Demand for gas is expected to increase an estimated 12-20 Bcf/d by 2020, pushing domestic gas demand to 82-90 Bcf/d — up from about 70 Bcf/d now — driven by increasing liquified natural gas (LNG) exports (4.2-6.8 Bcf/d); exports to Canada and Mexico (2.5-3.4 Bcf/d); power generation (3.2-5.6 Bcf/d); industrial (1.5-2.8 Bcf/d); and transportation (0.5-1.0 Bcf/d), according to a recent analysis.

“We believe this demand increase will first meaningfully impact the gas market in 2015 (less than 18 months away), when we expect 2.2 to 3.2 Bcf/d of incremental gas demand to come on-line in that year alone,” the Simmons analysts said in a recent report. “By 2018, estimated total incremental gas demand reaches a staggering 11 to 16 Bcf/d.”

Timely reviews of LNG export applications by the Department of Energy is critical to that forecast, said the Simmons team. “Should there be significant permitting delays, this could represent a lost opportunity for the U.S., given the competitive global nature of LNG supply.”

The abundance of U.S. gas resources has led to complacency about exploration and production (E&P) companies’ ability to meet demand growth, Simmons said. But to produce enough natural gas to meet analysts’ predicted demand increase would require higher natural gas prices than the current New York Mercantile Exchange prompt month price of $3.75/MMBtu, they said.

“We have spoken to numerous E&P’s who do not plan to drill gas wells until gas prices are at least $4.50 to $5.00/MMBtu for some duration. By looking at the forward gas curve, one can see Nymex gas prices do not reach about $5.00/MMBtu until 2019.” By then, Simmons expects 11-18 Bcf/d of incremental gas demand.

“While we believe a substantial amount of economic gas production can be brought online at $5.00/MMBtu, we would not be surprised if the forward curve needed to move higher than $5.00/MMBtu (why not $6.00+?) to catalyze industry reaction and fill a potential demand gap.”

Late last month Wunderlich Securities raised its domestic gas price forecast to $3.70/Mcf for 2013, up from $3.25, and raised the 2014 forecast also to $3.70 from $3.20 (see NGI, July 29). EIA also last month said it expects Henry Hub prices to average $3.76/MMBtu in 2013 from 2012 averages of $2.75.

Fitch sees more risks to U.S. West Texas Intermediate (WTI) crude oil prices through the longterm. The updated WTI base-case price is set at $95.00/bbl in 2013, with the long-term base case price raised to $75.00/bbl. The 2013 stress case WTI was raised to $80.00/bbl but long-term stress-case prices remain unchanged at $50.00.

Meanwhile, the EIA last Monday said U.S. spot prices for natural gas liquids — ethane, propane, normal butane, isobutane and natural gasoline — have moderated this year on surplus supplies, flat-to-moderating demand, export constraints and infrastructure bottlenecks.

“Ethane spot prices have been below the 2007-2012 range for every trading day in 2013 so far,” noted EIA. “For the first six months of 2013, ethane prices averaged 27 cents/gallon, over 45% below the price for the first six months of 2012” (see related story).

Ethane prices have been low this year compared to natural gas prices, which has prompted gas processors to leave it mixed in the natural gas stream (ethane rejection), said EIA. “Accordingly, net ethane production was down 9% for the first four months in 2013 compared to the same period in 2012, which may be applying some amount of price support.”