Natural Gas Price Forecast - April 1
Posted: Mon Apr 01, 2019 3:53 pm
Raymond James published a new report on the U.S. natural gas market (dated 4-1-2019)
Conclusion: gas demand is NOT the problem - the reason we are bearish on gas prices is due to what's happening on the supply side.
"After an exceptional growth year in 2018, U.S. power demand is set to decline in 2019 and then slowly edge up longer-term. More importantly for
gas, it will continue to gain share in the electricity mix, albeit not at the unusually strong pace of 2018. In addition, gas demand is being bolstered
by petrochemical projects, pipeline exports to Mexico, and the ramp-up of LNG exports. Putting all this together, the overall picture for U.S. gas
demand is very healthy. However, that does not mean that we are ready to turn bullish on U.S. gas prices. Simply put, looking at demand is not
enough - that would be a textbook example of an unwise "one hand clapping" approach. The healthy demand picture is being overwhelmed by
the continuing surge in gas supply. As shown below (left), supply growth from dry gas plays (mainly Marcellus and Utica) is being compounded by
associated gas (mainly Permian). The latter means that the better things get for oil prices, the worse they get for gas prices. As such, our above
consensus oil price forecast translates into a fundamentally weak outlook for gas prices. In addition, we expect a slower pace of coal retirements.
Therefore, we expect a significantly looser market this year - averaging 1.6 Bcf/d - as shown in the graph to the right. This equates to nearly an
additional 600 Bcf in storage at the end of the injection season. After a four-year high of $3.07/Mcf in 2018, we forecast Henry Hub averaging $2.80/
Mcf in 2019 and then falling further to a cyclical trough of $2.30/Mcf in 2020."
My forecast/valuation models assume that natural gas will average $2.75 in 2019 and $2.50 in 2020. RJ's forecast is based on "normal weather" for the next two years. Since we begin the refill season with gas 550 Bcf below the 5-year average, a HOT SUMMER could have a SIGNIFICANT impact on RJ's forecast.
Conclusion: gas demand is NOT the problem - the reason we are bearish on gas prices is due to what's happening on the supply side.
"After an exceptional growth year in 2018, U.S. power demand is set to decline in 2019 and then slowly edge up longer-term. More importantly for
gas, it will continue to gain share in the electricity mix, albeit not at the unusually strong pace of 2018. In addition, gas demand is being bolstered
by petrochemical projects, pipeline exports to Mexico, and the ramp-up of LNG exports. Putting all this together, the overall picture for U.S. gas
demand is very healthy. However, that does not mean that we are ready to turn bullish on U.S. gas prices. Simply put, looking at demand is not
enough - that would be a textbook example of an unwise "one hand clapping" approach. The healthy demand picture is being overwhelmed by
the continuing surge in gas supply. As shown below (left), supply growth from dry gas plays (mainly Marcellus and Utica) is being compounded by
associated gas (mainly Permian). The latter means that the better things get for oil prices, the worse they get for gas prices. As such, our above
consensus oil price forecast translates into a fundamentally weak outlook for gas prices. In addition, we expect a slower pace of coal retirements.
Therefore, we expect a significantly looser market this year - averaging 1.6 Bcf/d - as shown in the graph to the right. This equates to nearly an
additional 600 Bcf in storage at the end of the injection season. After a four-year high of $3.07/Mcf in 2018, we forecast Henry Hub averaging $2.80/
Mcf in 2019 and then falling further to a cyclical trough of $2.30/Mcf in 2020."
My forecast/valuation models assume that natural gas will average $2.75 in 2019 and $2.50 in 2020. RJ's forecast is based on "normal weather" for the next two years. Since we begin the refill season with gas 550 Bcf below the 5-year average, a HOT SUMMER could have a SIGNIFICANT impact on RJ's forecast.