SG Commodities Review: US Natural Gas

SG Commodities Review: US Natural Gas

Laurent Key
2013.03.20

■ SG research’s Cal 13 price forecast was revised 20 cents higher vs last quarter at $3.70, due to the bullish withdrawals experienced at the end of the winter.

■ March HDDs will likely end up 17% above the 30-yr normal. Above-normal March residential demand have led to a revised end-of-March inventory forecast of 1.75 Tcf, 50 Bcf below our latest quarterly outlook.

■ Consequently the prompt contract rose and the whole curve moved in line, resulting in a disconnect between current summer prices and the supply and demand balance that would result from the realization of the curve.

■ The detail of our forecast shows downward pressure on spring and summer maturities, with prices hovering in a $3.30-$3.75 range, followed by a strong recovery in October - December to levels above $4.5.

■ With current prices north of $3.90, coal-to-gas switching has vanished in the East, while production is expected to remain more or less stable for the year. This much looser S/D picture than last year for the coming spring is the main driver of the expected price correction. Assuming a 10-yr normal summer, lower CDDs and coal-to-gas switching yoy should contribute the most to larger injections.

■ With our bearish summer price forecast priced into the S/D model, end-of-October inventories should end up at 3.7 Tcf; a low level for the start of next winter.

■ If winter 2013-2014 is normal, the inelastic new demand from the EG sector (amid coal plant retirements) should push S/D balances to tighter territories yoy. In this case, prices would likely spike to $5 by January 2014.