US natural gas prices should average between $3 and $4/Mcf next year, two top gas analysts said Monday, noting the market won't support continued low prices.
"We expect 2013 Henry Hub spot natural gas prices to remain in the $3 to $4/Mcf range next year. Prices above $4.50/Mcf or below $2.50/Mcf are unsustainable, in our view," Oppenheimer analyst Fadel Gheit said in a note to clients.
"US gas prices have nearly doubled from $1.90/Mcf in April, the lowest in 12 years, due to low demand caused by an unusually warm winter and increased production from horizontal drilling and hydraulic fracturing," Gheit said. "These factors depressed US gas prices to unsustainable levels."
"Although we expect prices to rise over time with the usual volatility exacerbated by speculation, we think the US gas price discount to oil will remain significantly above historical levels," Gheit said.
Canaccord gas analyst John Gerdes said 2013 prices should average $4/Mcf, with the gas market looking at shifting from being oversupplied to undersupplied in the next injection season.
"Robust gas-fired power demand served its purpose in rebalancing the gas market," Gerdes said of what he calculates is a 5 Bcf/d increase in power burn year-to-date. He expects that demand from the power sector will drop 1 Bcf/d in 2013 as prices rise to $4/Mcf.
The 2012 increase in gas demand has chewed through the storage overhang, reducing it from 900 Bcf to 200 Bcf above last year, Gerdes said. He estimates the gas market is 2.5 Bcf/d undersupplied as dry gas production has shrunk across the US with the exception of Pennsylvania's Marcellus Shale.
"Gas-directed drilling overcorrected to the downside in concert with extraordinarily weak gas prices," Gerdes said. "In the wake of extremely weak gas prices, the exploration and production industry has cut gas-directed activity to roughly 430 rigs, which is markedly below the 600 to 700 gas rigs necessary to maintain market equilibrium long term."
"Consequently, gas storage should be meaningfully lower year-over-year exiting the 2012/2013 heating-season," Gerdes concluded. "We expect gas in storage to approximate year-ago levels before year-end, and assuming 15-year average winter weather, exit the 2012/2013 heating season approximately 600 Bcf below the prior year."
"If the storage dynamics materialize as displayed, our $4 gas price forecast next year clearly has upside bias," Gerdes concluded.
