Natural Gas Supply/Demand

[dan_s]

Basically, I agree with this analyst's opinion. However, I do think a cold January could cause front-month NYMEX gas to spike to $5.00/mcf sometime in Q1. An early Spring will cause gas prices to drop back. A cold April (like we had last year) would be very bullish for natural gas prices. I continue to use $3.50/mcf in my 2014 forecast models, but Q1 is obviously going to be much higher. - Dan

Adam Longson, CFA, CPA – Morgan Stanley
December 19, 2013
We view the 2014 strip as unsustainably high, particularly for the Apr-Oct injection season. Recent trends have been bullish due to harsh winter weather, but these trends are likely temporary. Supply should recover from recent freeze offs, and there are few sources of incremental demand to provide an offset when heating demand fades. Moreover, we believe supply will continue to grow as new infrastructure comes online, which means power demand will need to increase YoY to balance the market. The challenge is that at current forward prices, power demand (before retirements) would likely fall by 1.5 bcf/d YoY during the injection season, resulting in an oversupplied market. Thus, prices need to come in below the forward curve to keep the market in balance.

Weather can continue to support prices in the short run, in our view. A much colder than expected Nov and Dec has tightened the physical market and lifted gas prices. Not only has this lifted heating demand (particularly in the weather-sensitive Midwest), but it has also reduced supply through freeze offs. An explosion at a gas processing plant has further curtailed supply for now. These trends – particular demand strength - should hold as long as cold weather remains in place. Assuming the current cold forecast is realized and our other base case assumptions hold, prices could average ~$4.10/mmBtu for 1Q14, but only $3.62/mmBtu for 2014.

My Take: 1Q14 Ngas should be much higher than $4.10. - Dan