Stronger-than-expected natural gas production levels prompted Goldman Sachs analysts, in a note Monday, to lower their 2013 price forecasts.
Goldman Sachs now expects NYMEX natural gas to average $4.05/MMBtu for the balance of 2013, with third-quarter 2013 prices averaging $3.85/MMBtu and fourth-quarter prices averaging $4.25/MMBtu. Prior price estimates had forecast $4.40/MMBtu for the balance of 2013.
Primarily, analysts said that debottlenecking the Marcellus Shale region has driven stronger-than-expected production growth.
"With rig counts stable in the Marcellus, this growth in production is most likely driven by the addition of new processing plants that are allowing uncompleted wells to come online," Goldman Sachs analysts said in the note.
Examples of this include the Mobley II, Majorsville III, Sherwood II and Natrium processing plants in West Virginia.
As nationwide rig counts have remained stable, analysts predict that this production growth is temporary. They said that for drilling activity to increase outside of the Marcellus Shale prices will need to average $4.25-$4.50/MMBtu on a sustainable basis.
However, the analysts added that additional processing plants coming online later in the year and uncertainty on the size of the backlog of uncompleted wells are risks to their belief that production growth will slow.
"We would argue that the price required for an actual pick-up in drilling activity could be even higher, as most producers remain focused on liquids-rich opportunities," Goldman Sachs analysts said. "Further, once the decision is made to increase gas-directed drilling, there is a lead time involved in re-allocating capital, moving back rigs and actually bringing new wells on."
Goldman Sachs also bumped its production forecasts and end-of-summer storage levels slightly higher, saying that production will now grow at 250,000 Mcf/d in 2013 compared with a prior forecast for flat production year-over-year. The firm subsequently raised its storage level to 3.775 Tcf, about 100 Bcf above its last published forecast.
"Resilient growth in natural gas production has kept injection levels above the seasonal norm and working inventory above our forecast path," analysts said in the note.
Goldman Sachs analysts also said that higher injection levels imply that coal-to-gas switching has declined year over year.
"While reduced switching demand can appear bearish in the near term, it is in fact a reflection of the structural tightening shift in the supply-demand balance," the firm said.
Goldman Sachs analysts also lowered their CAPP coal price forecasts from $60/short ton to $57/st, which was also a factor in lowering their gas price forecast.
"Importantly, our updated coal-to-gas substitution forecast accounts for most of the Appalachian coal in our switching stack," analysts said.
They said that as a result, higher coal-to-gas substitution on cooler-than-normal summer weather or stronger production growth than they expect would require prices to fall below their current levels in order to start displacing Powder River Basin coal.
"This in turn would bring natural gas prices down to $3.40/MMBtu, below their current level," analysts said. "Interestingly, the large potential for PRB coal switching suggests that $3.20/MMBtu should prove a floor to prices this year even should production growth accelerate even more (in the second half of the year)."
