Energy Ink

Slowing U.S. natural gas production could herald price lift

Analyst sees optimism in shifting structural demand, slowing production

Guest Post

October 11, 2012

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Snow is on the ground in Calgary. This means three things:

1) Bad drivers

2) People complaining about bad drivers

3) Natural gas watchers and producers anxiously wondering if, after one of the warmest winters on record last year, the cold weather is a harbinger of what’s to come

Martin King, vice-president of institutional research at FirstEnergy Capital, did not try to predict the weather this morning. He did, however, introduce a bit of sunshine into what has been a gloomy outlook for natural gas of late.

One of the positive drivers King sees in the space is a flattening out of U.S. natural gas production. There are a number of reasons producers have eased off the accelerator. The biggest, according to King, is that very few of them can make money drilling expensive wells in resource plays at rock-bottom gas prices.

Average U.S. supply costs are north of $4 per million British thermal units, he noted in a presentation at Calgary’s Petroleum Club this morning. Current forward prices don’t cross that threshold until early 2014. Overall, he predicts U.S. supply growth of 0.5 billion cubic feet per day next year – substantial, but “certainly not the gangbusters growth that people are talking about.”

Anecdotal observations from the U.S. Federal Reserve’s quarterly Beige Book support this view (I came across this handy report via Atlantic Media’s recently launched, and highly recommended, Quartz news site).

Here’s a sampling of economic observations from Fed branches around the country:

From Cleveland: “Conventional oil and natural gas production held steady during the past six weeks, with little change projected in the upcoming months.”

From Kansas City: “Natural gas prices remained very low, although several contacts anticipated a slight increase in prices due to lower levels of exploration and winter supply concerns.”

From Dallas: “Producers concentrated their production on oil, as the prices of both natural gas and natural gas liquids remain very low.”

In this King sees reason for optimism. In an energy market update released today, FirstEnergy pegs the average estimated NYMEX price at $4.10 per MMBtu next year, up from $3.75 previously. In Alberta, the AECO price will climb to an average estimate of $3.51 per 1,000 cubic feet next year, up from an previous estimate of $3.18.

The rally will be led, in part, by a “structural demand” swing of up to 4 billion cubic feet per day, King projects, as pollution rules in the U.S. curb coal-fired power generation and natural gas gains market share in the transportation sector.

Even so, caution remains the prevailing sentiment. “My general view is a lot of people are looking at the price jump we’re seeing now as a pre-winter rally that won’t last,” King said following prepared remarks. Producers are waiting to “see if it has some running room.”

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