The outlook for North American natural gas prices remains bullish for this summer and likely to the end of the year, after gas futures prices topped $4/MMbtu last week.
Analysts expect price strength to continue, thanks to short supply due to lack of additional US production and strong demand, as utilities and marketers vie with new power generation capacity for gas supplies.
Houston-based Raymond James & Associates Inc. had already forecast $4 gas in the third quarter and $4.30 gas in the fourth quarter. The fact that the New York Mercantile Exchange gas contract for June and the forward months have already surpassed the $4 level indicate "how extremely anticipatory that commodity markets have become," said Raymond James analyst John Gerdes.
Gerdes says the gas market is underbalanced, with supply lagging behind growing demand from new power generation, which has been rising 3%/year for the past 12-15 years.
And with the level of gas supplies coming from Canada expected to remain flat, supply shortfalls and volatile price movements will likely continue.
Gerdes estimates that supply in storage will be about 500 bcf below 2.9 tcf-the historical average for the beginning of the withdrawal season-by Nov. 1. While this past winter was warmer than unusual, the dissipation of La Niña after this summer could mean the US will be facing a cooler winter with less supply, Gerdes says. A return to normal temperatures would increase demand in the commercial and residential sectors, which could increase prices drastically.
Market shifts
In the past, power generators and utilities usually were the only markets looking for gas, which they injected into storage to meet wintertime demand, says Dave Purcell, energy analyst with Houston-based Simmons & Co. International. But with new power generation coming on line, particularly in the US Northeast, and a hot summer forecast this year, demand for electricity has increased, which also will keep upward pressure on gas prices. Coal-burning generating units generally don't have excess capacity during the summer months, and this will exacerbate the problem.
Even with 650 rigs drilling for gas in the US and a strong rig count since last year's fourth quarter, noticeable gas production growth hasn't been achieved, says Purcell.
Increasing production under current conditions would be very difficult, given that production from individual wells is declining by as much as 40% or more in some producing areas.
Increasing the rig count and E&P outlays are the only ways to achieve that growth, Purcell says.
Whatever happens, prices aren't likely to fall back below $3/MMbtu in the next year or two.
