Energy analysts with Wells Fargo Securities LLC on Wednesday increased their natural gas price forecasts for 2013 and 2014 and cut estimates for 2015.
The 2013 estimate was revised upward to $3.71/MMBtu from $3.33, while in 2014, gas prices should average $4.30, versus $4.10. The gas price estimate for 2015 was trimmed to an average of $4.50.
Gas price forecasts by independent analysts and the U.S. Energy Information Administration (EIA) all have been revised higher over the past week (see Daily GPI, April 10, April 9; April 8; April 5; April 4). The reasons given, mirrored in comments by Wells Fargo’s team, include the cold end to the 2012-2013 winter and EIA Form 914 data indicating declining production.
“Getting commodity specific, with regard to natural gas, the sentiment is obviously much improved from a few months prior,” wrote Wells Fargo senior analyst David Tameron. “We do note, however, that the change is mostly related to the price reaction in response to weather and ensuing storage levels, not necessarily changes in underlying supply.”
The Street may be “more positive on natural gas,” but “there is reservation. We remain reserved as well, waiting for more positive demand trends before we get more bullish.”
Even with a sharp decline in the number of onshore gas rigs in operation, and the cutback by producers to drill this year in dry gas plays, associated gas from stepped-up oil drilling “has overwhelmed what would have been price signals in prior cycles,” said Tameron. “And we think the next phase for natural gas will be infrastructure projects that have the ability to add meaningfully incremental supply to the market.”
According to Wells Fargo’s numbers, 47 processing expansions or new projects are on the drawing board, along with 15-20 gas pipeline projects. “While these projects are not exclusively dry gas projects, they should bring ‘stranded gas’ into the market,” Tameron noted.
Based on conversations with its exploration and production clients, the consensus for the near-term is that “natural gas is overbought, and most are expecting a pullback,” he said. “We agree.”
However, “no one seems in a hurry to sell their pure-play natural gas stocks…Most portfolios want or need some exposure to natural gas, so the higher quality names exposed to the lower cost basins (read Marcellus) will likely continue to be more sticky.”
Following a few years of big industry investments in oil and liquids plays, “we think 2013 should be a year in which cash flows begin to catch up to capital expenditures as margins expand,” said Tameron, “especially if crude and gas can maintain current levels.”
Tudor, Pickering, Holt & Co. analysts think that barring a “significant weather event,” such as a “really hot summer,” gas prices may struggle to “stay much above $4.00/MMBtu near term.” Analysts Brandon Blossman and Neel Mitra wrote Wednesday that at $4 gas prices, “coal and gas are competing for a large piece of the power generation pie, and small differences in gas price, regional supply/demand dynamics and generator behavior drive big changes in relative gas/coal demand.
“At $4.50/MMBtu natural gas, we continue to see coal as the clear favorite, and below $3.50, gas is generally the power generation fuel of choice.” According to the duo, coal-to-gas switching “continues to be THE biggest piece of natural gas demand dynamics,” and 2013 won’t be an exception.
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