Morgan Stanley cut its 2012 forecast for U.S. natural gas futures by 30 percent, citing less-than- estimated heating demand.
The bank cut its estimate to an average of $2.70 per million British thermal units from $3.85 for 2012, Hussein Allidina, the head of commodity research in New York, said in a report today. U.S. heating demand was 450 billion cubic feet less than Morgan estimated, leaving so much supply that excess stored gas may be forced onto the market to keep the facilities operational, a so-called ratchet issue, according to the note.
“Natural gas will likely be range bound between $2.50 and $3 per million Btu for much of 2012, barring any surprises from weather or rig efficiency,” Allidina said. “Extremely mild weather can cause ratchet and congestion issues, sending prices to sub-$2, but this would be short-lived.”
Gas futures have declined 11.3 percent this month and are now trading at $2.651 per million Btu after dropping to the lowest level in almost 10 years this month, according to data compiled by Bloomberg. The fuel is the worst-performing commodity on the Standard & poor’s GSCI Spot Index this year.
“With gas at levels where a small change in fundamentals can have large ramifications for the gas balance and prices, any outlier weather event could dramatically reshape the outlook for gas,” Allidina said.
Gas in storage is at a seasonal record at 3.1 trillion cubic feet, a surplus of 531 billion cubic feet from a year earlier, Morgan Stanley said, citing U.S. Energy Department data. The bank estimated end-October inventory at 4.15 trillion, a record.
Gas may find a floor as utilities consider using the fuel instead of coal, according to the report.
Gas prices below $2.50 on a sustained basis will prompt utilities to switch from coal to gas-fired facilities, balancing an oversupplied market and eliminating the need to shut production wells, according to the note. The utilization rate for gas-fired generation in the U.S. averaged around 25 percent in 2011, even as natural gas prices fell, it said.
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