Natural Gas prices firming up

[dan_s]

Adam Longson, CFA, CPA – Morgan Stanley
May 18, 2015 2:44 AM GMT
Tightening supply/demand balances fueling recent gas rally. Our long held view for tighter gas balances and recovering prices post-shoulder season is playing out. Over the past two weeks, natural gas has rallied 20% to four-month highs, surpassing $3/MMbtu. While May injections will come in above 5Y averages of 395 Bcf, recent fundamentals indicate that the rate of injections have slowed and could remain below year ago builds for the remainder of the month. In line with our recent note Natural Gas: Nearing A Floor? (21 Apr 2015), the culprits to the tightening balance have been the combination of slowing supply growth and the resurgence of strong gas power demand as warm early summer temps and coal-to-gas switching have kept gas burn high. That said, prices may be capped in the low $3 range given the potential for demand losses. A move from $3 to $3.50 at Henry Hub would drive a ~700 MMcf/d loss in gas power demand. Therefore, sustained higher exports to Mexico and warmer weather may be required for the next move higher.
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I believe falling gas production from the oil shale plays will be a key to a much tighter North American natural gas market heading into next winter. Combined with increasing exports (LNG and Mexico), there is a good chance we see $4.00 gas by year-end. - Dan