Natural Gas looks a lot better in 2H 2016

[dan_s]

Stephen C Byrd – Morgan Stanley
March 2, 2016 9:19 AM GMT
Extreme mild weather has created market dislocation, driving a large downward correction in nat gas prices, and some (but not all) exposed companies. We now see improving supply-demand, with our new nat gas price forecast above consensus in 2H16 into 2017, driving several cross-sector implications.
Nearing the bottom - time to get bullish on natural gas. Unlike oil, natural gas has faced bearish trends for years, forcing the market to stay balanced by lifting gas power demand higher via low prices. As a result, supply growth is now moderating, and enough structural demand has been stimulated to begin tightening the market. The next three months may be challenging as seasonal demand wanes, but with the curve so underpriced, we believe this will be an ideal opportunity to add to positions. At current levels, the 2H16 strip should generate more gas power demand than is needed to solve the current inventory situation. Furthermore, after inventories normalize, the focus should turn to the underlying US gas balance, which is more constructive than prices suggest (i.e heading into 2017). We see 2016 prices averaging $2.20/MMbtu or 8% above the strip, and 2017 prices averaging $3.20/MMbtu or 26% above the strip.

I pointed out turning my luncheon presentation last week that the U.S. natural gas market will be 4 to 6 Bcf per day tighter heading into next winter. That is a BIG difference and should push Ngas prices back toward $3.00. As noted above, other analysts will start to see this as we move into the second half of this year. - Dan