Natural Gas Monthly Fundamental Forecast May 2012

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Outlook and Recommendation

Natural Gas ended April at 2.166

Highest: 2.333

Lowest: 1.903

Difference: 0.431

Average: 2.070

Change %: 8.40

Nymex natural gas prices slipped below $2 per mmbtu in mid-April (a decade low). While gas-targeted drilling has declined, a high level of development drilling of liquids-rich shale continues to boost associated gas production. Barring a hot summer, storage injection could surpass design capability.  However, a number of medium-term developments could eventually lift prices. Natural gas is currently nine times cheaper than crude oil — a development which should spur the use of compressed natural gas in public vehicles (buses), some corporate fleets and heavy trucks. In a reversal of trends a decade ago, the U.S. is expected to emerge as an exporter of LNG (mostly from the Gulf Coast). LNG export projects totaling 15.4 bcf/d have been proposed — from 5 Brownfield and 3 Greenfield terminals (21% of U.S. natural gas production of 72.49 bcf/d in January 2012 in the Lower-48 states). Of this, 12.5 bcf/d will require export licenses for shipments to Non-Free Trade Agreement countries. The U.S. Federal Energy Regulatory Commission has just granted a construction permit to Chenier Energy’s Sabine Pass project in Louisiana, with exports to begin in 2015/16.

Interestingly, this LNG may be shipped to South America, where high-priced diesel is sometimes used for power generation.  Alaska North Slope producers (Exxon Mobil, BP and Conoco Phillips) together with TransCanada PipeLines will also consider building an LNG liquefaction facility in Southern Alaska for shipments to Asia (3 bcf/d by 2020). However, this project faces competition from more advanced B.C. projects (including Kitimat LNG). The window to place new LNG projects in the Asia Pacific market may be prior to 2017/18, before competition heats up.

 Current natural gas prices around $2 are unsustainable over the medium term, as ‘dry’ natural gas plays from shale require $3 to yield a 9% return on capital over mid-cycle costs

Natural Gas Inventory (EIA)

The EIA released its most current storage inventory report earlier today showing, that natural gas storage in the U.S. in the week ended April 27 rose by 28 billion cubic feet, compared to expectations for an increase of 31 billion cubic feet.

Working gas in storage was 2,576 Bcf as of Friday, April 27, 2012, according to EIA estimates. This represents a net increase of 28 Bcf from the previous week. Stocks were 840 Bcf higher than last year at this time and 857 Bcf above the 5-year average of 1,719 Bcf. In the East Region, stocks were 425 Bcf above the 5-year average following net injections of 20 Bcf. Stocks in the Producing Region were 325 Bcf above the 5-year average of 715 Bcf after a net withdrawal of 1 Bcf. Stocks in the West Region were 107 Bcf above the 5-year average after a net addition of 9 Bcf. At 2,576 Bcf, total working gas is above the 5-year historical range.

 

WEEKLY

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About: FX Empire Analyst - Barry Norman

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