Based on evidence that U.S. natural gas production has flattened and the shift back to coal-fired generation is “stickier” than expected, Stephen Smith Energy Associates on Thursday raised its price forecast through the rest of 2013.
Henry Hub (HH) prices now are expected to average $3.90/MMBtu in 2013, up from a previous estimate of $3.50. For the rest of the year, Smith sees an average HH price of $4.00/MMBtu in 2Q2013, climbing to $4.10 in 3Q2013 and $4.15 in the final three months of the year. The analyst previously had pegged prices to average $3.55/MMBtu in 2Q2013, $3.70 in 3Q2013 and $3.80 in 4Q2013. In 2014 prices were lifted by 40 cents from a previous forecast to $4.40/MMBtu.
On Tuesday, Barclays Capital analysts also raised their gas price forecast to an average of $4.00/MMBtu price in 2Q2013 and 3Q2013, with a $4.10 average in the final period (see Daily GPI, April 4).
“With considerable help from a very cold March, more evidence that gas production growth has flattened out, sub-normal nuclear generation, and some evidence of a ‘stickier’ shift back to coal-fired generation than the recent gas-versus-coal price spreads would suggest, the current gas storage surplus (versus 2006-2010 norms) is now down to only 100 Bcf as compared with 500 Bcf in mid-December,” said Smith.
This past winter consisted of two distinct seasons, he said. The nine weeks of December through January had 11% fewer heating degree days (HDD) than normal, while the eight weeks of February through March had 8% more HDDs than normal.
The 17 weeks ending March 29 recorded 104 HDDs, which was 3.3% fewer than Smith’s regionally weighted HDD norms. Still, the gas storage surplus declined by almost 165 Bcf over the period. In the last five weeks of the period, HH cash prices averaged $3.76/MMBtu, compared with a $3.33 average for December through February.
“However, despite these stronger prices, the storage surplus declined by a massive 300 Bcf in the last five weeks of the 17-week span,” Smith said. “Most remarkably, this decline occurred with a five-week heating load, which was only 89 HDDs more than normal.
“This outcome suggests that either gas demand was less vulnerable than expected due to higher prices…or that production was in fact lower than most sources believed. Either of these explanations would suggest a tighter supply/demand balance going forward.”
The impact of higher gas prices has not been “nearly as strong as expected,” he wrote, which “suggests that either production is weaker than first thought or that gas is retaining higher generation shares at any given price (i.e., stronger than expected trend gains from some combination of coal shut-downs or gas startups).”
Onshore production growth “remains a key uncertainty,” Smith said, “but recent evidence suggests lower and perhaps even no sequential growth over the course of 2013.” May and June are both expected to be hotter than normal as well, and as a result, “we are likely to begin July with a storage deficit versus 2006-2010 norms.”
Until Energy Information Administration-914 production data was issued on Feb. 29 and March 31, “Marcellus-driven growth appeared to be gaining momentum, but the combined sequential decline for December/January showed a combined two-month decline of 1.37 Bcf/d for Lower 48 onshore production.”
Because of the data, Smith cut projected production growth rates for the second consecutive month.
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