Energy Prospectus

Oil: Morgan Stanley Commodity Strategist Adam Longson forecasts Brent prices to average $110/bbl through the balance of 2013 and the WTI-Brent differential to average $13/bbl (implied WTI price of $97/bbl), as he views his projected rise in OPEC production as a bullish demand-driven indicator.
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Natural gas: In 2013 to date, Henry Hub natural gas prices have climbed 18% to $3.94/MMBtu. Adam forecasts prices to average $3.74/MMbtu through the remainder of 2013, driven in the near-term as excess storage inventories are drawn and seasonal demand rises. While he has an upside bias to his forecast, upside potential is nonetheless limited by coal-to-gas switching and potential supply response at higher prices.

IMHO we will see forecasts for natural gas prices going up after the next two EIA storage reports. - Dan

This is from an article written two weeks ago:

The Canadian arm of brokerage firm Raymond James has a slightly more bullish interpretation (of the recent spike in natural gas prices). “For the last 3 weeks, we’ve seen some of the largest withdrawals from US gas storage in the last 10 years.
> Yesterday’s withdrawal was 145bcf (billion cubic feet) – the 5-year average was 89bcfand the previous record was 115bcfin 2007.
> Last week’s withdrawal was 146bcf– the 5-yr. average was 104bcf– 146bcfis the highest since 2003.
> Week before was 171bcf– 5-yr. average was 117bcf.

You get the idea...

And it is more than just cold weather doing this. Focusing on the last 4 weeks, 2008, 2007, and 2010 were all colder than 2013 – yet 2013 is seeing bigger withdrawals.”

They see the gas price that balances the market for the rest of 2013 being in the $3.85-4.15 range. I think if the market really had a comfort level that price could hold, the rally in stocks could continue (even though almost no one is making full cycle profits at that price). [I believe the price of NG needs to be over $5/mcf before we see the hint of more drilling in the dry gas areas. - Dan]

Certainly gas drilling has fallen off dramatically – yet North American production stays constant to slightly rising. The giant Marcellus Shale in the northeast US is THE perfect example… it just took over from the Haynesville Shale in Louisiana as the largest producer of natural gas in North America at over 7bcf/d-while the rig count in the play dropped by a third. A third!

Another brokerage firm, Canada’s National Bank Financial, points out that in the US, “Residential/Commercial demand has been up about 17Bcf/d (+50%) over the same period last year, with cold weather expected to persist through the week ahead to provide near-term support.”

Denver-based Bentek, one of the best natural gas forecasters, is projecting storage levels exiting the winter season (end of March) at 1.7Tcf, which is 25% below the same period last year and in line with the five-year average. [I think it goes lower. - Dan]

This week's EIA gas storage report will be very interesting. - Dan