Austin Skyline


Raymond James Energy Stat of the Week
by J. Marshall Adkins

Energy Stat: U.S. Natural Gas Price Deck Moving Lower - Should You Care?
August 31, 2015

Since the beginning of the year, we have twice lowered our 2016 and long-term oil price forecasts, but our longer-term U.S. natural gas price assumptions have stayed unchanged. Frankly, we have not really been tightly focused on this side of the U.S. energy equation since investors seem to have totally forgotten about U.S. natural gas. We NEVER get questions on U.S. gas prices! Since U.S. oil and gas prices are not closely linked anymore, it is not surprising that Henry Hub gas prices have consistently hovered just under our $3.00/mcf forecast while oil prices have crashed and burned. The problem is that falling gas extraction costs and stubbornly low industrial gas demand growth means our 2016 gas price decks of $3.55/mcf and our long-term deck of $3.75 is too high. Put simply, there is plenty of U.S. natural gas to meet rising demand at prices of $3.25 (or possibly lower) for the next five years. Sure, oil directed U.S. rig count decline is having some slowing effect on the pace of associated gas supply growth, though not as much as some would have expected. The bigger issue is that estimated Marcellus growth (~1.5 Bcf/d) combined with soon-to-open pipeline takeaway capacity (of which we have identified ~4 Bcf/d) is set to more than compensate for price-driven associated gas production declines elsewhere. On the gas demand side, power generation and exports to Mexico have been strong but industrial demand has been consistently much weaker than we (and most) have modeled. Of course, LNG projects should help in 2016/17, but there should still be more than enough gas at $3.25/mcf to satisfy this growth. The bottom line is that we think readily available Marcellus/Utica gas supply will keep a lid on U.S. natural gas prices well into 2016. While there are reasons to believe that the demand picture will look more encouraging in 2017 and beyond, the industry's ability (and willingness) to deliver low-cost supply represents an offset to any gas demand resurgence. Putting everything together, we are lowering our 2016 Henry Hub forecast from $3.55 to $3.25 and our long-term forecast from $3.75 to $3.25. Even though our new 2016 natural gas forecast is about $0.25 below consensus, it is still about $0.25 above the futures strip. Given the fundamental outlook detailed below, we believe any bias to our new deck would be to the downside rather than upside.