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“We have revised our Q4 12 price forecast from $3/MMBtu to $3.35, mainly to reflect the higher-than expected reduction of the storage overhang during the summer.” the Bank said in a report. However, the pr..

10 Oct 2012

Commodity Online
According to investment bank Barclays, Q4, 2012 marks the reset of the natural gas markets, as storage anxiety disappears.

“We have revised our Q4 12 price forecast from $3/MMBtu to $3.35, mainly to reflect the higher-than expected reduction of the storage overhang during the summer.” the Bank said in a report.

Meanwhile natural gas producers continued to add to hedges for both this year and next year in Q3 despite anemic Q3-Q4 2012 prices and calendar 2013 prices.

Producers are just as well hedged for 2013 this year as they were for 2012 last year, the Bank said.

“Despite being well-hedged, producers are unlikely to shift back to drilling gas next year as the promises to investors to shift to oil and liquids instead would be very difficult to reverse, in our view.” report added.

“We believe the following year calendar prices need to reach $4-4.50 for some producers to shift back to drilling gas again.” the Bank said. “We believe Q4 12 and calendar 2013 prices compared to where the forward curve is at the moment have much more downside than upside, therefore producers might have limited windows of opportunity to hedge further”, report continued to say.

However, recent upticks in 2013 and 2014 prices, which will be temporary in Barclays' view, represent good opportunities for producers to protect their gas-related cash flow.

Price correction in the offing?

The prompt contract continued to suffer corrections after reaching the yearly high of $3.53/MMBtu in the first week of October.

“Indeed, although we do believe that November marks the reset of the market, as storage anxieties disappear in the withdrawal season, the escalation in prices has come too quickly and prices have overextended beyond underlying fundamentals, in our view.” Bank noted.

As the prompt contract has already priced in the 1-5 day colder-than-normal weather forecast, while the market has consistently underestimated the storage injection over the past three weeks (a fact that the market cannot ignore forever), Barclays believes there is further downside to prices, unless the winter proves to be much colder-than-normal.

Further back on the curve, calendars 2013 and 2014 have rallied to $3.93 and $4.25, respectively, in the past two weeks and have held onto those levels despite more hedging efforts from producers.

“We believe that calendar 2013 prices have also risen too far and too fast and should see corrections in the following months.” the report said.


The market finished Thursday with prices gaining one to two pennies across the curve despite a bearish storage injection, which was 5 Bcf higher than the market’s expectations. For the week ending on 28 September, storage added 77 Bcf, with the West injecting 8 Bcf and the East, 42 Bcf.

The producing region added 27 Bcf. The storage overhang fell 3.43 Bcf/d y/y. However, most of the incremental tightening is due to higher y/y heating demand and nuclear outages, while y/y coal displacement is only down to about 1 Bcf/d, compared with the peak at 6 Bcf/d y/y reached in the spring.

Climate impact

The National Weather Service Climate Prediction Center has forecasted a mild to neutral El Nino for the 2012-13 winter. An El Nino winter means that we could see above-normal temperatures in the Northeast. However, even if El Nino does occur, the negative phase of the Northern Atlantic Oscillation could still cause atmospheric blocking and bring colderthan- normal temperatures to the region.

“We are aware of the above-normal weather forecasts by meteorologists; however, due to the reasons above, winter weather remains a big unknown to us. Therefore, in our model, we have assumed a return to normal temperatures.” the Bank said.

The EIA-914 report showed a lower-than-expected moderate m/m production growth for the lower-48 states in July. Gross withdrawals grew only 290 MMcf/d m/m, lower than Bank's expectations and what the pipeline data indicated, as sample pipeline flow showed that production grew 760 MMcf/d m/m in July.

Although this implies some bullishness, the big picture remains unchanged; July production is only about 160 MMcf/d lower than the supply peak reached in January. In other words, production appears to have remained flat through July since the beginning of the year.

“We expect to see a moderate m/m production decline in August due to Hurricane Isaac and a moderate m/m growth in September as the growth trajectory returns to its previous path. Although some of the latent supply appears to be delayed into Q4 rather than materializing in September, it remains a large upside risk for natural gas production that could bearishly surprise the market in the next few months.” report concluded.

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