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Chilly Winter Prompts Higher Natural Gas Price Estimates

Thursday, 18 Apr 2013 02:19 PM

 

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U.S. natural gas prices should jump 39 percent this year, thanks to a chilly end to the winter that sent inventories plummeting from record levels, according to a Reuters poll of analysts.

Natural gas prices are expected to average $3.84 per million British thermal units at Henry Hub, the benchmark U.S. supply point in Louisiana, in 2013, according to the poll. That would be up from previous estimates of $3.66 per mmBtu and the $2.77 average price last year.

The revision came after a string of nuclear plant outages spurred power demand and also helped drive gas inventories below the five-year average at the end of the winter heating season, the first time below that benchmark in 18 months.

The surprise boosts in consumption helped shake out some of the bearish sentiment that has dominated the natural gas market since the boom in output from shale gas sent prices plummeting to 10-year lows below $2 in April of last year.

"Compared to last year, we are more constructive on natural gas prices and we think there is a tighter balance in terms of supply and demand, especially after the cold weather in March ate a big hole in storage," said Shiyang Wang, natural gas analyst at Barclays in New York.

Stricter environmental rules in 2014 were expected to force more coal plant retirements and boost baseload gas-fired power demand. That should help drive prices up another 10 percent to $4.24 though estimates were unchanged from the previous poll.

Prices in 2015 were expected to gain another 8 percent to $4.58 as economic activity ramps up and utilities continue to shift to cleaner burning gas instead of coal to generate power.

Of the 28 participants in the poll, there were 18 upward revisions, five downward revisions and four unchanged. One did not participate in the previous poll. Price estimates for 2013 ranged from a low of $3.40 to a high of $4.40.

SUPPLIES TIGHTEN, STORAGE WORRIES FADE

Record natural gas production, primarily from booming shale output, and a huge inventory surplus were key factors in driving gas prices down last year to a 13-year low average below $3.

Utilities typically stockpile natural gas from April through October, then withdraw stored supplies from November through March to help meet heating demand.

The unexpectedly cold finish of the heating season and a chilly spring burned up a lot of stored gas and wiped out concerns about inventories topping capacity, a factor that plagued prices in 2012. Total gas-weighted heating degree days were 18 percent higher than last winter, according to data from the Thomson Reuters North American natural gas research team.

Winter withdrawals this year of 2.25 trillion cubic feet were 770 billion cubic feet, or 52 percent more, than last year and 15 percent above the normal pull during the heating season.

U.S. Energy Information Administration data last week showed that total domestic gas inventories ended the heating season at 1.673 tcf, 32 percent below last year's record high finish of 2.48 tcf and 3 percent below normal.

Even with an average storage build of about 2 tcf, stocks should head into next winter at about 3.7 tcf, well above what would be needed to meet even the coldest winter demand, but below estimated peak storage capacity of just over 4.2 tcf.

In addition, record high production, while not slowing much even with gas drilling rigs recently posting a 14-year low, has showed some signs of stalling. EIA expects production to be up fractionally in 2013, but some analysts note that output seems to be flattening and could even drop slightly this year, giving further support to prices.

"On the supply side, the rig count is down and production is probably down, but the question is how much," said Steve Thumb, principal at Energy Ventures Analysis in Virginia, although he noted new pipeline capacity, particularly in the Marcellus shale in Appalachia, has made it difficult to correlate the rig count decline with production levels.

DEMAND PICKS UP

Last year, the steep slide in gas prices prompted many utilities to switch off coal-fired power plants to maximize gas use for power generation. It was by far the biggest driver for demand growth, adding an average of about 6 bcf per day, or 8 percent, to total consumption in 2012.

While higher gas prices this year, up nearly 20 percent in the first quarter and more than double year-ago levels, have steered some utilities back to coal, analysts expect gas to continue to gain market share in the electric power sector as stricter environmental rules make coal burning more expensive.

U.S. power companies have already shut more than 15,000 megawatts of inefficient coal plants and have announced plans to retire an additional 35,000 megawatts in the next few years.

Almost all new baseload generation will be gas fired.

Even after the recent run up in prices, analysts note U.S. gas is cheap relative to global supplies and is attracting more interest from industry, either as a source of energy or as a feedstock for chemical and fertilizer manufacturers. Some analysts expect industrial demand to add as much as 1 bcf per day to estimated consumption of about 70 bcfd in 2013.

"Manufacturers are relying on expanding facilities or restarting mothballed facilities, but over the longer term, there are a lot of new industrial facilities planned," Barclays' Shiyang Wang said.

Residential and commercial use of gas for space heating is also expected to gain this year and the EIA expects overall U.S. demand to rise 1 percent this year. Pipeline exports to Mexico are also expected to pick up this year and help tighten overall fundamentals.

But despite a market in better balance, most analysts see only limited potential for price gains in the near term, noting a strong price run up to $4.50 or higher could further dampen utility demand and prompt producers to increase supply.

"Utilities should burn less gas this year. You have to anticipate that with gas prices above $4," said Teri Viswanath, analyst at BNP Paribas in New York.

© 2014 Thomson/Reuters. All rights reserved.

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