Dancy on natgas

[k1f]

Do you share J. Dancy's pessimism about natgas price in 2018? Despite
volatility, he explicitly sees natgas supply rapidly rerturning to
adequate--$3 Mmbtu--where it's been off and on in 2017. <<we expect a
down year in gas, and thus our traditional preference for oil-centric stocks
remains intact.>>

Does this call for changes in the Sweet 16? Your forecast?
Thanks for publishing the Dancy letter: it's full of chewy info.

[dan_s]

For now, I am using $3.00/MMBtu at HH for natural gas as the average price for 2018. By the end of January, natural gas in storage s/b ~300 Bcf below the 5-year average and it is "strange" to me that the low storage level is not having more of an impact on the gas price. As I have posted here a zillion times, we have a lot of natural gas reserves in the ground but demand is currently exceeding deliverability.

That said, if the speculators who set the gas price perceive we have abundant supply then the gas price will stay low. I may need to lower my 2018 & 2019 gas price, but for now I am sticking with $3.00. Note that no matter how low I take the gas price it will have almost no impact on AR's valuation since they have 100% of their 2018 and 2019 gas hedged at prices much higher than where gas is selling today. Also, I think I may be under-estimating NGL prices which will offset lower gas prices for all of the "gassers".

You should all be heavily weighted to the companies that get most of their revenues from liquid sales. Oil and NGL prices are set by global supply/demand fundamentals and the global liquids market is much better. A booming U.S. economy + plus the propane situation caused by the recent artic blast is very bullish for NGL prices.

You should all read Joe's report carefully. Joe is an EPG member and you can e-mail him a question if you like. His contact info in on the cover letter.

[k1f]

There seem to be related but separate problems here. One is fundamentals in relation to price. But
as you note, the other is traders' perception of natgas s/d and price. To some extent it
might not matter how the price of natgas spikes if traders continue to believe (as we do) in a
bestguess future scenario. If they firmly believe some version of J. Dancy's scenario (natgas to
self-correct in 2018, with bearish consequences for us), they can believe the sensible course is for
them to (as you say) "hang tough." Le's hope they don't.

[dan_s]

EIA; "Estimated U.S. natural gas demand on January 1, 2018 reached 150.7 billion cubic feet, surpassing the previous single-day record set in 2014, according to estimates from PointLogic. Much colder-than-normal temperatures across much of the United States have led to increased demand for heating, much of which is provided by natural gas. Although residential and commercial natural gas consumption did not appear to surpass previous records, higher consumption in the electric power and industrial sectors, greater exports of natural gas to Mexico, and more demand for liquefied natural gas (LNG) feedstock gas contributed to the recent record demand level.'

IF YOU OWN ANY GASSERS, READ THIS: https://www.eia.gov/todayinenergy/detail.php?id=34412

Note that the all-time record weekly draw from U.S. natural gas storage is 288 Bcf set in January, 2014. I predict that a new record will be reported Thursday for the week ending 1/5/2018.

[k1f]

It will be interesting to see if the draw shakes the faith of J. Dancy and others that natgas s/d
will self-correct before long. Ordinarily "it's different this time" would seem ridiculous. But in
some quarters the natgas pic has changed so dramatically that some unexpected people are
believers. Fingers crossed.

[wilmawatts]

Raymond James has gas at $2.75 for 2018, which is interesting, they are the most bullish firm historically on the energy sector. At least the last few years.

So $3.00 average is a rip roaring bull versus RJ. Wall Street will have to be convinced to get higher prices

[k1f]

Actually natgas has been over $3 from time to time in 2017.

[dan_s]

I have been using $3.00 ngas price in all of my forecasts for a long time. I thought I was being "conservative".

One of our new members sent me a report from a respected energy research firm dated 12/3/2017. Here are the bullet points.

> U.S. natural gas production is expected to reach a fourth quarter 2018 average of 80.7 Bcf/d, rising 5.6 Bcf/d from fourth quarter 2017 volumes
> Marcellus & Utica production is currently forecasted to reach 30 Bcf/d in the fourth quarter of 2018, rising by more than 4 Bcf/d from fourth quarter of 2017 production
> NGL production is returning to prominence with improved realizations to WTI
> The South Central region is poised for further growth as new midstream infrastructure links stranded supply to markets along the Gulf Coast and into Mexico

It reflects the current Wall Street "paradigm" that there will be ample natural gas supply to meet rapidly rising demand. Maybe I have been in the industry too long, but I have NEVER seen U.S. gas production increase as rapidly as they are forecasting and I am a bit skeptical of such bullish supply forecasts since the gas rig count has remained so low. I still think expectation of so much new associated gas coming on-line is optimistic because we now have so many high decline rate horizontal wells in the mix.

Their long-range forecast for the U.S. gas market:
"Looking to 2018 and beyond, the U.S. is poised for a massive increase in natural gas demand. We are forecasting United States natural gas demand to increase 18.3 Bcf/d between 2017 and 2022, with further increases after 2025 if the global LNG market materializes. Additionally, demand will be supported by the growth of Mexican exports and to a lesser extent the expansion of the power sector in the United States. Supply across the U.S. is expected to grow to fill this expanded demand, with 2022 natural gas production reaching a potential 97.2 Bcf/d. This growth will stem primarily out of the Marcellus & Utica shale, with additional volumes coming out of the South Central U.S."

MY TAKE: I just don't see supply ramping up as fast as demand if ngas stays under $3.00. Upstream companies just won't allocate enough capital to gas is there is such a large disconnect between liquids prices and ngas prices. The United States is by far the world's largest and most important gas market. There needs to be a "fair price" for such an important commodity.