Natural Gas Price

[dan_s]

From Morgan Stanley, August 1, 2017

Natural gas forwards have now fallen to levels in-line with (or below) our bearish sub-$3 forecast, driving a more constructive risk-reward into winter 2018.

Our recent natural gas Insight, Don't Bet Against Innovation, highlighted structural changes to the US natural gas market that should put a ceiling on medium- and long-term prices: a precipitous decline in breakevens for unconventional US oil plays, substantial capital productivity improvements in natural gas extraction, and power sector demand erosion from cheap renewables and improving hydrology in the western US. However, the persistent weakness in natural gas over the past several months has put 2H17 and winter 2018 forwards modestly below our unchanged price forecast. As a result, we now see a more attractive setup with upside to prices into winter 2018 (assuming normal weather), and expect recent weakness to support stronger near-term gas demand from the power sector. Lastly, while oil has been volatile, we remain comfortable with our associated gas forecast. From a stock standpoint, gas heavy E&P's stand to benefit from an improved commodity backdrop, driving Drew Venker's upgrade of COG from EW to OW.Sell-off in natural gas supports near-term price upside and stronger power sector demand. Front month natural gas prices have declined further in recent weeks, from ~$3.00 to $2.80/mmBtu. We expect this to drive modest incremental coal-gas switching, supporting ~0.5 Bcf/d of stronger power burn Aug-Oct. We are reducing our end-Oct 2017 inventory forecast to ~3.80 Tcf from 3.85 Tcf as a result. Assuming normal weather, we now see modest upside to 2H17 and winter 2018 prices.