Energy Prospectus

If you live along the East Coast from North Florida to Maine, you need to watch the January 2 daily update at https://www.weatherbell.com/premium/

The fact that this blizzard is hitting NYC on Thursday is good for energy investors because the same day a big draw from natural gas storage will be reported. New England also consumes a lot of heating oil for space heating.

Something that needs to be remembered is that refilling natural gas storage is not an option. It must happen each year from April to October in order for utilities to make it through the next winter heating season.

U.S. natural gas in storage is normally around 1,700 to 1,800 BCF at the end of March. This year, we will be near that level in early February. Normal weather from mid-Feb through March should take storage down to 1,200 BCF. The additional half a trillion cubic feet is additional demand during the refill season.

As I have posted here before, 2018 is the first year of a big increase in export demand for natural gas.

Demand for U.S. gas will be 5-6 Bcf per day higher in 2018 than it was in 2017. That is not an insignificant increase.

How do you reconcile Raymond James’ bearish outlook for natural gas in 2018 with your bullish outlook?

RJ is assuming a normal winter and I am not. I believe ngas storage will be ~500 Bcf lower at the end of March, 2018 than it was at the end of March, 2017. Refilling storage is part of demand each year. This winter will increase gas demand by 2 Bcf per day from April to October. That is a big deal.

Let me be PERFECTLY CLEAR: I think natural gas will average $3.00/MMBtu in 2018. From where we are today, that is not an outlandish prediction.

We have an abundant supply of natural gas in the U.S., but reserves and production capacity are two totally different things. We are at the beginning of a big surge in demand for natural gas, primarily for export. Demand for U.S. natural gas is going to increase by ~5 Bcf per day each year from 2018 to 2020. We've not had a surge in demand like this before.

Let's see where gas prices are in two weeks, when storage is over 300 Bcf below the 5-year average.

Raymond James 1-2-2018: "Weather is always a major gas market wildcard. It alone can easily push U.S. market balances into a bullish or bearish scenario. We aren’t weather forecasters, and we won’t try to be – as always, we simply assume 10-year average or “normal” weather in both 2018 and 2019. Compared to moderate temperatures in 2017, a return to “normal” weather should tighten the gas market in 2018 by ~2 Bcf/d y/y (and with no meaningful y/y impact on 2019). We reiterate our long-standing view that the U.S. has all the gas it needs at sub-$3.00 over the long run, assuming near-normal weather."

My forecast/valuation models assume Henry Hub gas averages $3.00/MMBtu for 2018 and 2019. My valuations of AR, GPOR and RRC are all based on this assumption. I do adjust for regional price differences and for their hedges. AR has almost all of their gas for 2018 and 2019 hedged at higher prices. See hedges for each company at the bottom of the individual forecast models.