Natural Gas Prices

[dan_s]

Dr. Joe Bastardi at Weatherbell.com is forecasting a colder than normal winter, but the Super El Nino will cause a mild start to winter. El Nino's pump a lot of moisture into the southern jet stream. This results in colder than normal temperatures from Texas to the east coast. Joe thinks winter will be 6 to 8 decrees below normal for most of the SE quarter of the U.S.

Citi’s Meteorologist recently issued his initial…winter weather outlook calling for a ~4% colder-than-normal upcoming winter, although this would be ~1% warmer than last winter. Notably, actual [Heating Degree Days, or HDDs,] last winter ended up being within <1% of Citi’s original winter weather forecast issued at this same time one year ago. However, the National Oceanic and Atmospheric Administration is calling for a warmer-than-normal first half to the winter, including in the greater population-weighted demand Northeast region, counter to Citi’s forecast. Nonetheless, we estimate every 1% deviation from normal during the winter (November-March) equates to ~50 Bcf of incremental natural gas heating demand, all else being equal and apart from relative price-driven variations in coal-to-gas switching. Our current 2016 composite spot natural gas price forecast of $3.00/MMBtu (Citi’s official forecast is the Commodities Team’s $3.00/MMBtu Henry Hub forecast) is based on the assumption of normal weather going forward. But as we outlined in our recent Summer Wrap-Up note, a 4% colder-than-normal winter, all else being equal, would lift our 2016 composite spot forecast to $3.20/MMBtu. Notably, a colder-than-normal winter would likely bolster momentum for the more natural gas-leveraged E&P stocks including Chesapeake Energy, Southwestern Energy, Cabot Oil & Gas, Eclipse Resources, Rice Energy, and Range Resources. But we would also point out that Citi’s outlook for much colder temperatures in the Northeast also carries the risk of negatively impacting Appalachian and Utica producers if well freeze-offs and operational disruptions occur, as has often happened in the past during periods of extreme cold or harsh weather.

What does this mean for gas prices? I am expecting natural gas prices to stay low (about where they are today) through year-end. Gas prices should ramp up during the first quarter of 2016. If winter drags on into April, we could see $3.50/mcf for the rest of the year. More coal fired power plants will be shut down and more natural gas fired power plants will be built. LNG exports begin in December, 2015 and will ramp throughout 2016.

This is why I will be adding more exposure to natural gas to our Sweet 16.