In the midst of the coldest winter in 33 years, natural gas has once again become a draw—an epic draw.
Goldman Sachs Group Inc. revised its gas demand projections after updated weather forecasts suggesting the current winter weather shock will extend through March, analyst Samantha Dart says in a recent report.
Dart previously said record US natural gas draws in the winter were unlikely to affect gas price, because production would be available to meet any demand. However, steep inventory draws this winter and in the coming weeks likely spell production growth of 200 million cubic feet per day (MMcf/d) in the Marcellus and Utica.
“The exceptionally harsh 2013-2014 winter has led to the largest winter inventory draws on record, ultimately removing from gas stocks at least 780 billion cubic feet (Bcf) more than what we would have observed under normal temperatures,” Dart says.
The analyst lowered end-of-March gas inventory expectations to 1,198 Bcf from 1,388 Bcf, reflecting the colder-than-average temperature forecast for the first half of February.
“In our view, this relatively low number reinforces the need for higher production growth than what we now embed for the year in order for the market to reach comfortable levels of inventories by the end of October,” Dart says. “Accordingly, we raise our 2014 Nymex natural gas price forecast to $4.50/MMBtu from $4.25/ MMBtu.”
Those prices are enough to incentivize increased drilling in areas such as the Fayetteville and Haynesville shale plays.
“To be clear, we believe the Marcellus and Utica plays have the potential to easily fill the additional take-away capacity scheduled to come online at least over the next 18 months, especially as the sharp widening of the basis did not leave local price levels for producers below marginal cost of production.”
With relatively stable demand in the Northeast in recent years, one of the main ways to move production out of the Marcellus play involved pushing out pipeline imports into the region. As Marcellus gas production grew from 2009 onward, it started to soften the regional balance.
“As a result, local producer prices, which we track here by looking at Dominion South, declined relative to the Henry Hub benchmark, with a particularly steep drop this past summer as total Marcellus production hit take-away capacity constraints,” she said.
Goldman Sachs has not changed its $4/MMBtu 2015 Nymex natural gas forecast. Dart says the market is likely to return to an oversupplied balance by then because of higher prices.
“In fact, this potential production response in 2014 would pose a downside risk to our 2015 price forecast since it is typically slow to reverse, as we have seen in recent years,” she says.
Since 2009, the declining price of gas has incentivized Northeast consumers to buy the cheaper Marcellus gas rather than more expensive imports from the rest of the country. Net pipeline flows into the Northeast declined to less than 2 Bcf/d from nearly 10 Bcf/d in early 2009.
However, persistent delivery bottlenecks are also in focus as demand intensifies. The recent $120/MMBtu spike in gas prices in New York underscores the ongoing bottleneck issues that plague some of the high-consumption areas in the country.
“The system's inability to deliver enough natural gas to where consumers are, especially given that the fastest-growing shale-gas play in the US, the Marcellus, is nearby, raises the issues of what it takes to solve such bottlenecks,” Dart says.
However, several projects are underway that would change the delivery system.
—Darren Barbee
For more coverage of natural gas pricing and take-away, see OilandGasInvestor.com and MidstreamBusiness.com.
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