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POLL-U.S. natgas price forecasts trimmed, coal shutdowns lend support

Joe Silha
Friday, 1 Nov 2013 | 11:36 AM ET

* 2013 prices up 34 pct from 2012's depressed levels

* High supplies temper price expectations

* Prices seen rising 8 percent in 2014 and 2015

NEW YORK, Nov 1 (Reuters) - Energy analysts trimmed their U.S. natural gas price estimates for 2014 and 2015 but still expect prices to gain 8 percent in each of the next two years, as new environmental rules for coal-powered electricity prompt more gas consumption, a Reuters poll showed. While gas prices have bounced up from last year's decade lows, expectations for a fourth straight year of record domestic output have cooled the forward price outlook. "Next year we see production growth accelerating, and to the extent we require coal displacement to balance, the market will still be oversupplied," said Biliana Pehlivanova, head of gas and power research at Barclays in New York. The Reuters poll put the consensus forecast for spot prices this year at Henry Hub, the benchmark U.S. supply point in Louisiana, at $3.71 per million British thermal units. That would be down 4 percent from the July poll estimate of $3.87, but up about 34 percent from the 13-year low average of $2.77 posted in 2012. For the first nine months of this year, Henry Hub prices have averaged $3.69, up 45 percent from the $2.55 average at the same time last year, according to Reuters data. In 2014, production is expected to post a record for a fourth straight year. Estimates for next year ranged widely from $3.50 to $5, with consensus at $4.02, up 8 percent from 2013 but 4 percent below the average posted in the July poll. Prices in 2015 were expected to gain another 8 percent to $4.34 as stricter rules on mercury emissions (MATS) force coal plant retirements into high gear and prompt more utilities to rely on gas to generate electricity. "By 2015 and 2016, the market should tighten, with coal retirements really kicking in and liquefied gas exports getting underway," said Chris Kostas, senior analyst at Energy Security Analysis Inc (ESAI) in Massachusetts. Of the 30 participants in the poll, there were 23 downward revisions for 2013, one upward revision and two unchanged. Four did not participate in the previous poll or did not have an estimate for this year. Price estimates for 2013 ranged from a low of $3.40 to a high of $3.80.

AWASH IN SUPPLY Gas prices have rallied some since posting a six-month low of $3.129 in early August as late summer heat stirred better demand and rising tropical activity triggered concerns about potential disruptions in Gulf Coast supplies. But real storm threats never materialized and prices have been struggling, with shoulder-season demand tapering, inventories hovering not far below last year's all-time highs and production still flowing at a record-high pace. Explosive growth in output from shale plays like Marcellus in Appalachia and new pipeline and processing infrastructure are likely to keep supplies growing next year, with many analysts estimating that more than 1 billion cubic feet per day will be added to 2013's record high output of about 70 bcfd.

WAITING FOR DEMAND While U.S. gas prices are well up from last year's lows, they are still cheap when compared to global supplies. That should give domestic manufacturers a competitive edge and drive up demand from the industrial sector, adding 1 bcfd or more to estimated current consumption of 70 bcf daily. It should also favor liquefied natural gas exports, but overseas shipments of LNG are not set to begin until 2016. Pipeline exports to Mexico, however, are already on the rise and could add another 1.5 bcf to daily gas demand over the next two years, according to some analysts. But the real gains in demand are anticipated in the second half of this decade when LNG exports, expected to reach near 7 bcf per day by the end of the decade, take a big bite out of excess supplies. Stricter emissions rules should keep raising the cost of burning coal. By 2019, utilities are expected to shut an additional 35,000 megawatts of coal-fired generation and build more than 42,000 MW of gas units. Increased reliance on gas to produce power could add more than 5 bcf, or 7 percent, to daily gas demand by the end of the decade, according to Reuters data. Demand gains this decade are likely to exceed 15 bcfd and should eventually tighten the balance. But over the next couple of years, the gas market is likely to remain oversupplied which should temper any upward pressure on prices. Comfortable inventories have also curbed near-term concerns about supply. Utilities typically stockpile gas from April through October, then withdraw stored supplies from November through March to help meet heating demand. Domestic gas inventories look set to begin the heating season at about 3.85 trillion cubic feet, or just 2 percent below last year's record high. Without a cold winter to kick up heating demand, inventories could end the season with excess supplies and help weaken prices next year. "Unless we get strong storage drawdowns this winter, and then a fairly hot summer, prices in 2014 could be lower than this year," ESAI's Kostas said. Total gas-weighted heating degree days from November through March could come in close to the 30-year normal, or about 3 percent colder than last year, according to data from Thomson Reuters North America natural gas research team.

(Additional reporting by Eileen Houlihan; Editing by David Gregorio)