Gas bulls should pray cause da’ bears may own the day

Vincent G Piazza, Andrew Cosgrove, Gurpal DosanjhBloomberg Intelligence analysts

Natural gas above $3, like Joltin’ Joe, has left and gone away

U.S. natural gas prices will likely average well below $3 per MMBtu this winter and pressure on Appalachian-basis price differentials will persist as well, hurting Marcellus and Utica shale operators.

Seasonal weather demand, as measured by heating-degree days, may be weaker than last year, which will curtail gas use. Opportunities for coal-to-gas switching may yield modest share shifts, and resilient gas volume will continue, even with output growth subsiding due to reduced liquids drilling.

Natural gas futures drop as warm winter worry undermines outlook

Natural gas futures contracts for delivery over the next few years have declined as production is expected to continue to outstrip demand.

Though 25% of production growth has been driven by associated gas from the main oil plays, output may remain elevated for the near future.

As pipelines from the Northeast are completed over the next two years, much more gas will be able to move west into the Mid-Continent and South into the Gulf Coast.

This will allow low-cost Appalachian E&Ps to continue increasing output.

U.S. Natural Gas Strip Prices

Forecasts of warmer winter to keep gas bears from hibernating

Natural gas storage may begin the traditional winter withdrawal season in November approaching a new record of four trillion cubic feet.

NOAA projections suggest winter will be 3% warmer vs. last year, as measured by heating degree days, while Commodity Weather Group expects a 9% warmer winter.

Less heating demand will reduce natural gas consumption, likely pressuring seasonal prices. While associated gas-production growth may have peaked, stockpiles will remain elevated heading into the spring shoulder season.

Consumption in winter may come up short for natural gas market

Winter weather is the key cyclical demand driver in residential and power markets, though structural improvements in U.S. employment and manufacturing may stimulate commercial and industrial demand. This helps to tighten balances, even with the strong secular growth headwind of natural gas output.

The winter of 2015-2016 is expected to be warmer than last year, based on EIA data, and a BI study suggests consumption may average about 84 billion cubic feet a day, 8% below last year.

U.S. Winter Natural Gas Consumption vs. HDDS

Muted U.S. residential winter demand to restrain prices for gas

Domestic residential heating demand during winter is one key driver of natural gas balances and regional hub prices.

Residential gas consumption may average just shy of 23 billion cubic feet a day during winter 2015-2016 vs. 24.8 Bcfd last year, which will likely keep natural gas prices lower, absent colder weather than expected.

On average, a daily rise or fall of one heating degree day translates to an increase or decrease in residential consumption of about 1 Bcfd, based on EIA and BI data.

U.S. Residential Winter Gas Consumption vs. HDDS

High industrial gas use doesn’t trump less demand in other areas

Industrial sector gas use is projected to rise about 5% this winter to average about 23.7 billion cubic feet a day, based on EIA data, which may provide a limited ballast to natural gas prices, given lower consumption in more cyclical categories.

Industrial demand and consumption this winter is expected to increase and likely accelerate through 2019 with new petrochemical and fertilizer plants. This secular growth trend drives natural gas consumption higher and provides a longer-term domestic demand channel.

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