Our forecast for natural-gas prices proved to be spot-on in 2014:
Natural-gas prices have climbed to more than $4.50 per million British thermal units (mmBtu) from less than $3.50 per mmBtu in early November. But this seasonal resurgence will prove short-lived; we expect this commodity to average between $4.00 and $4.25 per mmBtu in 2014.
The cold start to the winter heating season–traditionally a season of peak demand–caused a faster-than-expected drawdown in natural-gas inventories, with the volume in storage falling from above the seasonal norm to about 250 million cubic feet below the five-year average.
However, the long-term trends in the North American natural-gas market haven’t changed. US production continues to hover near an all-time high despite a precipitous drop in the number of drilling rigs targeting this commodity.
This anomaly reflects robust drilling activity in oil and liquids-rich shale plays and drilling efficiencies that enable producers to sink more wells with fewer rigs and boost initial production rates.
Not only did benchmark US gas prices average $4.24 per million British thermal units in 2014—in line with our expectations—but market dynamics driving this price action played out as we had expected.
That is, last winter’s short-lived rally in natural-gas prices stemmed unusually frigid temperatures, not a fundamental shift in supply and demand conditions; the US market has ample shadow productive capacity that can ramp up whenever gas prices improve.
This winter, above-average temperatures have weighed on heating demand, pressuring natural-gas prices. Pundits who banked on a cold snap to help bail out losing positions in gas-focused producers will be disappointed once again.
More important, the outlook for a potential recovery in natural-gas prices looks even more cloudy than in 2014. Plummeting crude oil prices and slowing economic growth have depressed spot prices of liquefied natural gas (LNG) in Europe and Asia to levels that reduce the appeal of US exports.
For example, the cost of liquefying, transporting and re-gasifying North American LNG cargos is expected to range between $3 and $4 per million British thermal units; with UK natural-gas prices hovering around $7 per million British thermal units, the arbitrage opportunity looks tenuous at best.
Expect the downdraft in Asian and European LNG prices to lead to the delay or outright cancellation of many proposed US export schemes, limiting the scope of this long-anticipated demand outlet.
Our outlook calls for US natural-gas prices to average somewhere in the neighborhood of $3.50 per million British thermal units this year. Investors betting that 2016 will bring a sustained rally in natural-gas prices will also be disappointed.
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Elliott and Roger on Oct. 29, 2018
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