It’s been glum tidings regarding natural gas prices and supply-and-demand fundamentals for some time, despite occasional bright spots. In a recent report from Guggenheim Securities LLC, however, analyst Subash Chandra points to “some surprising successes.”

The foundation in this more optimistic outlook for the commodity is demand. Chandra notes that storage withdrawals for this winter could exceed 2.3 trillion cubic feet (Tcf), “the highest levels of withdrawal since the winters of 2013 and 2014, which were considerably colder.” Demand in January could be a new record, he says, “and gas inventories could end the withdrawal season at 30% below year-ago levels.”

This despite record gas production that increased 8% year-over-year or 5 billion cubic feet per day (Bcf/d) to 6 Bcf/d. Also, the January withdrawals closed in on the more than 900 Bcf takedown during the polar vortex of January 2014, which he said was “remarkable, because gas production is 10 Bcf/d higher than in January 2014, and temperatures weren’t nearly as cold.”

To hold onto these gains, which are largely driven by power sector demand, will require a price for gas that can compete with coal and hydro. Weather is not the main factor by any means. “We estimate power generation loads increased more than 5 Bcf/d while weather-sensitive demand increased 3 Bcf/d.”

Chandra said that sweet spot price is $2.80 to $3.

He noted that the rate of coal retirements is scheduled to double this year compared to last. “At current gas prices, we expect to reverse the market share losses to coal that were significant during the first half of the refill season.” He looks for hydro output to fall “perhaps precipitously” due to snowpack, streamflow and reservoir levels. “Snowpack and streamflow conditions south of Washington State are 50% below normal or worse,” he said, compared to last year which was generally over 10% of normal.

Another important demand driver for gas is often thought to be LNG exports, although the ramp for projects frequently extends beyond initial expectations. Guggenheim Securities pegged LNG exports as having increased 1.5 Bcf/d to double year-ago levels, but Chandra noted it was a “small change overall.” Still, he thinks next year should exceed 2018 LNG exports, with the potential for export capacity to double to 6 Bcf/d by year-end 2019.

However, he has reservations regarding the potential of exports to keep natural gas prices and fundamentals healthy. He noted that “exports are a safety valve rather than a path to prosperity. They are a way to relieve excess supplies. But U.S. producers can and must deliver natural gas on the low end of the cost curve to compete globally.”

He favors power generation as a driver for natural gas because it supports premium pricing rather than requiring cost leadership.

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