Energy Prospectus

Natural gas futures are getting a boost from a late season cold snap, which Dr. Joe Bastardi forecast several weeks ago. This week's winter storms should push natural gas storage levels back into the 5-year average by mid-April and delay the beginning of refill season.

We are still going to end the heating season with a lot of gas in storage, but each mcf drawn from storage before refill season starts helps.

Dr. Bastardi is now forecasting temperatures in the eastern half of the U.S. to be ABOVE AVERAGE in the second half of April and May should be HOT across the nation. This is bullish for natural gas demand as the gas fired power plants will fire up to meet air conditioning demand.

Robert Rapier and I discussed the improving outlook for natural gas at the InvestFest Conference in San Antonio. Below are comments from Robert's March 23th article in Investing Daily.

There are a number of long-term drivers for natural gas that should ensure strong demand growth for several more years. Last week the Energy Information Administration (EIA) highlighted one of the key demand drivers in Today in Energy: http://www.eia.gov/todayinenergy/detail ... ,mid.71911

The EIA projects that this year natural gas will supplant coal for the first time ever as the nation's leading power source on an annual basis.

Coal's market share (of electricity generation) has fallen from around 50% in 2000 to this year's estimated 32%. Over the same time frame, the market share for natural gas has increased from around 15% to this year's estimated 33%. Almost all of coal's losses in the power sector since 2000 can be explained by increased natural gas consumption.

This may come as a surprise to environmentalists that have been quick to highlight the role of renewables in the coal industry's woes. While renewables have indeed made a contribution, it pales in comparison with the damage the shale gas boom has inflicted on the coal industry.

Note that the shift in the power sector is only one driver of increasing natural gas demand. There are huge new investments underway in the chemical manufacturing sector that will further boost demand. The University of Texas' Center for Energy Economics has estimated that new petrochemical projects will boost industrial demand for natural gas by 19% to 31% by 2020.

There are additional demand drivers such as new liquefied natural gas (LNG) export terminals. The EIA estimated in a 2012 report that 12 billion cubic feet per day of natural gas exports would increase domestic natural gas prices by more than $1.50/MMBtu.

Two years ago, I warned of near-term downside for natural gas if production growth significantly outpaced demand. That is indeed what happened, primarily due to the moderate weather. But note that since 2000 natural gas prices have rarely dropped below $2/MMBtu, and every time that has happened prices subsequently rebounded above $5/MMBtu.

I don't expect the current situation with natural gas to be any different, especially considering the coming demand drivers, which in addition to the growing power consumption, LNG exports and petrochemical demand include rapidly rising exports to Mexico. Natural gas production growth has been robust for a decade, but current prices have caused output growth to flatten. The inevitable result will be higher prices, and big gains for North American natural gas producers.


Robert and I agree that the U.S. natural gas market will be 4 to 6 Bcf per day tighter by the beginning of the next heating season. U.S. demand is going from 80 Bcf per day in 2015 to 83 Bcf per day in 2016 and gas production is on a steady decline. Canadian gas production is also falling, so our friends to the north will have less gas to send us.

One group that will benefit from higher natural gas and NGL prices is the upstream MLPs. They have been hammered this year because they all have a lot of hedges rolling off at the end of this year. If they are forced to re-hedge at today's gas prices, they will be in serious trouble a year from now and may be forced to sell more assets to pay off debt. BBEP, MEMP and VNR all produce a lot of natural gas and NGLs. If natural gas moves over $4.00/mmbtu, I believe all three of these upstream MLPs will regain the market's confidence and they may be able to reinstate distributions to unit holders in 2017. MEMP is the safest bet of these three.

The EIA forecast that US natural gas prices could average $2.25 per MMBtu (British thermal units in millions) in 2016 and $3.02 per MMBtu in 2017.

Goldman Sachs (GS) estimates that natural gas prices will trade around $3.10 per MMBtu in 2016 and $3.80 per MMBtu in 2017. GS seems to see the tightening of supply/demand that is coming this summer. We will need prices over $4.00 per MMBtu in the 4th quarter to offset the low prices in the 1st quarter in order to average $3.10 for the year.

Moody’s forecast that natural gas prices will average $2.25 per MMBtu in 2016 and $2.5 per MMBtu in 2017. Moody's is conservative because their commodity price forecasts are used to evaluate debt.

NOTE that all of these forecasts were made early in March, prior to the continued sharp drop in the active rig count. I believe the sharp drop in "associated gas" from the U.S. oil shale plays will be larger than many analysts predict. Production from the Marcellus shale has already dropped due to the big decline in drilling activity. These forecasts assume a normal summer. A HOT SUMMER will significantly impact natural gas demand. An active hurricane season in the Gulf of Mexico could also impact gas supply. Last summer there was almost no tropical storm activity in the GOM.

Dan: thanks for posting this information, very informative and helpful. With U.S. natural gas prices so low here, I think we are looking at an investment opportunity that rarely comes along in the energy sector. We are still at Stage 1 on this bull, where most investors remain bearish on natural gas here, looking at the Inventory overhang, with the build / shoulder season approaching, and they are still reluctant to buy....waiting...waiting...waiting. By the time these investors see the natgas train has pulled out, prices will be much higher and they will all be trying to get on the train thinking they will miss the move. It's different than crude oil, where the market is so dependent on many international forces...OPEC bickering and dealing, etc. With natural gas, we know production is falling fast, demand is increasing....it's the weather that in my mind is the biggest variable in how quickly natural gas prices recover. We're getting an April polar blast, then hot weather...we may move straight from winter to summer this year...and that inventory surplus will decline.

My advice to me is do your DD, select your favorite natural gas sector ETFs, E&P stocks or MLPs, and the bull will take us to the promised land.

Be right .... sit tight, and I think we will be very well rewarded this year in natural gas. The market simply does not see this coming, so get in early here.

At current natural gas prices drilling new wells even in the heart of the Marcellus and Utica makes no sense. The number of rigs drilling for gas is at an all-time low and the big drop in "associated gas" oil shale plays is going to tighten supply/demand quickly. Dr. Bastardi is now forecasting a HOT May for the entire U.S.

There are many gas fired "peaking plants" in Texas, Louisiana, Mississippi, Alabama, Georgia and Florida that only run during the high demand air conditioning season. Those plants consume a lot of gas. A few years ago, the utilities had to draw gas from storage in August to meet demand.

El Nino is rapidly turning to La Nina, which means more GOM hurricanes this season and a normal winter.

Many signs of a much tighter U.S. gas market in about six months.

Sweet 16 members that produce a lot of gas includes SM, EOG, XEC, NFX.

Later this month we are going to publish new profiles on MEMP, VNR and EQT (a strong candidate for the Sweet 16).