U.S. natural gas prices will likely average well below $3 per MMBtu this winter and pressure on Appalachian-basis price differentials will persist as well, hurting Marcellus and Utica shale operators.

1. Gas bulls should pray
cause da’ bears may own the day
Vincent G Piazza, Andrew Cosgrove, Gurpal Dosanjh
Bloomberg Intelligence analysts

2. Natural gas above $3, like Joltin’ Joe, has left and gone away

3. U.S. natural gas prices will likely average well below $3 per MMBtu
this winter and pressure on Appalachian-basis price differentials
will persist as well, hurting Marcellus and Utica shale operators.
Seasonal weather demand, as measured by heating-degree days,
may be weaker than last year, which will curtail gas use.
Opportunities for coal-to-gas switching may yield modest share
shifts, and resilient gas volume will continue, even with output
growth subsiding due to reduced liquids drilling.

4. Natural gas futures drop as warm winter worry
undermines outlook

5. Natural gas futures contracts for delivery over the next few years
have declined as production is expected to continue to outstrip
demand.
Though 25% of production growth has been driven by associated
gas from the main oil plays, output may remain elevated for the
near future.
As pipelines from the Northeast are completed over the next
two years, much more gas will be able to move west into the
Mid-Continent and South into the Gulf Coast.
This will allow low-cost Appalachian E&Ps to continue
increasing output.

6. U.S. Natural Gas Strip Prices

7. Forecasts of warmer winter to keep gas bears from hibernating

8. Natural gas storage may begin the traditional winter withdrawal
season in November approaching a new record of four trillion
cubic feet.
NOAA projections suggest winter will be 3% warmer vs. last year,
as measured by heating degree days, while Commodity Weather
Group expects a 9% warmer winter.
Less heating demand will reduce natural gas consumption, likely
pressuring seasonal prices. While associated gas-production
growth may have peaked, stockpiles will remain elevated heading
into the spring shoulder season.

9. Consumption in winter may come up short for natural gas market

10. Winter weather is the key cyclical demand driver in residential
and power markets, though structural improvements in
U.S. employment and manufacturing may stimulate commercial
and industrial demand. This helps to tighten balances, even
with the strong secular growth headwind of natural gas output.
The winter of 2015-2016 is expected to be warmer than last year,
based on EIA data, and a BI study suggests consumption may
average about 84 billion cubic feet a day, 8% below last year.

11. U.S. Winter Natural Gas Consumption vs. HDDS

12. Muted U.S. residential winter demand to restrain prices for gas

13. Domestic residential heating demand during winter is one key driver
of natural gas balances and regional hub prices.
Residential gas consumption may average just shy of 23 billion cubic
feet a day during winter 2015-2016 vs. 24.8 Bcfd last year, which will
likely keep natural gas prices lower, absent colder weather than
expected.
On average, a daily rise or fall of one heating degree day translates
to an increase or decrease in residential consumption of about 1 Bcfd,
based on EIA and BI data.

14. U.S. Residential Winter Gas Consumption vs. HDDS

15. High industrial gas use doesn’t trump less demand in other areas

16. Industrial sector gas use is projected to rise about 5% this winter
to average about 23.7 billion cubic feet a day, based on EIA data,
which may provide a limited ballast to natural gas prices, given
lower consumption in more cyclical categories.
Industrial demand and consumption this winter is expected to
increase and likely accelerate through 2019 with new petrochemical
and fertilizer plants. This secular growth trend drives natural
gas consumption higher and provides a longer-term domestic
demand channel.

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