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“As some coal-to-gas switching will still be necessary in order to balance the market, we see natural gas prices capped at $4.30/MMBtu unless we get outright production declines.” the Bank added.

09 Oct 2012

NEW YORK(Commodity Online): Any upside to US natural gas prices will likely be capped by coal. If natural gas prices run up too quickly, the relative advantage of gas over coal disappears rapidly and power generators will switch back into coal, Bank of America Merrill Lynch said in a report.

“Case in point, if coal-to-gas switching were to decline to 2 bcf/d, we estimate end of October inventories would rise to 4.2 tcf, reigniting containment concerns.” the Bank said. “As some coal-to-gas switching will still be necessary in order to balance the market, we see natural gas prices capped at $4.30/MMBtu unless we get outright production declines.” the Bank added.

As production growth slows down and prices move higher, Bank of America Merril Lynch expects coal-to-natural gas switching to fall by 1.8 bcf/d. With total gas demand contracting by 0.6 bcf/d, inventories will likely stay elevated next year.

US nat gas finds balance

The US nat gas market has rebalanced quickly this summer, reducing the glut caused by overproduction and depressed winter demand. Stocks have built below the seasonal norm, alleviating concerns about storage containment.

In response, CAL 13 prices rallied to $3.90/MMBtu as lower inventories next year should allow the market to get by with less coal-to-gas switching. Against this background we raise our average 2013 US nat gas forecast from $3.50 to $3.75/MMBtu. In periods of temporary tightness, we could see spot prices briefly spiking above $4/MMBtu.

“We see little upside to forward prices next year as structural consumption still has to catch up with supply. In our view, US nat gas output remains too high and we expect 0.2 bcf/d of growth next year.” the Bank added.

There are important regional differentiations, though:

While drilling in high cost gas plays is already contracting sharply, it continues to increase in lower cost areas with a high liquid content like the SW Marcellus or the Eagle Ford.

Factoring in efficiency gains, gas supply from liquid shales is expanding strongly. Thus the market is subject to a tug of war between production falling fast in dry gas shale areas and growing quickly in lower cost areas with a high liquid content.


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