BMI View : For our short-term forecast for US Henry Hub gas prices, we expect range-bound trading to persist through 2013 and 2014. In 2013, the yearly average is forecast to come in at about US$3.75/mnBTU. A well-supplied gas market thanks to a steady increase in shale gas production and consumer price sensitivity will prevent drastic price increases, as export and infrastructure restrictions limit the reach of gas beyond the North American market. The same dynamics are likely to prevail in 2014, though market expectations for a tightening of supply could see prices trend higher particularly towards the latter half of 2014.
BMI's Short-Term Gas Price Forecast, US$/mnBTU
| || 2013f || 2014f |
|*2013 consensus = Average of Q313 and Q413 consensus forecast and average price in H113. Source: Bloomberg, BMI |
|Henry Hub - BMI Forecast ||3.75 ||4.05 |
|Henry Hub - Bloomberg Consensus* ||3.82 ||4.20 |
The shale gas boom in the US has dramatically altered gas price dynamics in the world's largest gas market. After years of steady increases, the onset of shale gas production sent prices that had briefly recovered from the 2008 crash back down from 2010 and hit a ten-year low of US$1.90 per mn British Thermal Units (mnBTU) in February 2012.
| Shale Gale Crashes Prices |
|Front-Month Monthly Henry Hub (US$/mnBTU)|
A glut in US gas supplies created by the shale gas revolution and exacerbated by legislation against gas exports beyond North America have given rise to low US prices. Once trading at around parity with the UK 's benchmark National Balancing Point (NBP), US Henry Hub is now heavily discounted to the UK benchmark - a reflection of US abundance in gas as opposed to the tight supply market beyond North America.
| US Gas: An Isolated Glut |
|Front-Month Henry Hub & National Balancing Point (NBP) - Rebased|
According to our new Natural Gas price forecasts, we expect US Henry Hub prices to stay relatively weak in the short-term but start moving upwards from 2015. This analysis lays out our short-term price outlook. We look at th e following factors in deriving our forecasts for Henry Hub :
US gas production and consumption;
US policies and its impact on linking US gas supplies to the international market.
More Than Sufficient Gas
According to the US Energy Information Administration (EIA), US gas production has increased 27.1% between 2002 and 2012 from 530bn cubic metres (bcm) to 673.8bcm. Much of this growth has come from shale gas; from just 7 % of total gas production in 2007, shale gas accounted for 35 % of total output in 2011 . By 2012, t he share of shale gas in the US' total production had risen to 44%.
| Shale Ignites Production Renaissance |
|US Gas Production - Shale Gas & Other Sources (bcm), 2007-2012|
In contrast, gas consumption has expanded only 9.6% between 2002 and 2012. Excluding the pick-up in gas use in 2012 encouraged by the collapse of gas prices, gas demand growth between 2002 and 2011 was only 4.8%. With production outpacing demand, thereby increasing available supply t o the market, this has helped drive down Henry Hub prices. A restrictive gas export policy also contributed to the glut and prevented prices from rising.
| Production Catches Up With Consumption Needs |
|US Gas Production & Consumption (bcm), 2000-2012|
| Shale Boom Hits Henry Hub |
|US Gas Production (LHS, bcm) & Average Price At Henry Hub (RHS, US$/mnBTU), 2000-2012|
Short-Term: Slow Uptick In Prices
Producers have reacted to the dramatic fall in gas pr ices by slowing new production as much as it is within their means to do so. Although gas output continued to grow from 641.3bcm in 2011 to 673.8bcm in 2012, year-on-year (y-o-y) increase in 2012 was a slower 5.1%, compared to 7.4 % the year before . Overall gas production in the first five months of 2013 rose only by 0.1% y-o-y.
| Slowing Down |
|US Monthly Gas Production (LHS, bcm) & Y-o-Y % Change (RHS)|
However, we do not anticipate any dramatic increases in prices in the remainder of 2013, barring unexpected outages of production or pipeline deliveries, for the following reasons:
Shale gas production will support gas supply availability. Although total gas output registered marginal growth, shale gas produc tion in the first five months of 2013 hit 120.1bcm - a 9.7% y-o-y increase from 2012. Associated gas produced from shale oil wells and the difficulty of shutting-in all shale gas wells altogether without incurring a loss will help support falling output from other gas sources.
No liberalisation of its gas export policy and inadequate export infrastructure. This will mean that Henry Hub prices will remain dependent on domestic demand. The first liquefied natural gas (LNG) export terminal to non-FTA markets - Sabine Pass - is not expected to come online until Q4 2015, while new pipeline capacity from the US to Mexico would only be available from late 2014 at the very earliest.
Consumer sensitivity to prices. End-users in the power industry in particular have shown to be very responsive to prices. While low prices - gas prices had averaged at US$2.28/mnBTU in the first five months of 2012 - had prompted many to switch to gas for power feedstock, the 69% increase in prices over the same period in 2013 to US$3.85/mnBTU has led some utilities to return to coal. This responsive to gas prices by consumers within the US would limit any wild upswing in prices.
| Gas Price Hike Pushes Utilities Away |
|% Share Of Various Energy Types In US Power Generation - May 2012 (Inner Ring) & May 2013 (Outer Ring)|
Indeed, as demonstrated by the graph below, in June 2013 Henry Hub has fallen through the support line that it has respected since April 2012, owing to a relatively well-supplied market and consumer price sensitivity - especially in the power sector. A cooler-than-expected summer has also seen weaker demand for gas than in recent years, accounting for the fall in prices in June.
| Consumer Sensitivity Caps Price Gains |
|Front-Month Weekly Henry Hub - 2009-Present (US$/mnBTU)|
Nonetheless, the same sensitivity to prices by both consumers and producers could see Henry Hub reverse this short-term fall through the rest of the year, particularly as winter approaches. Prices are also sufficiently low to continue supporting consumption growth in other segments. Compared to the 0.1% y-o-y growth in gas production in the first five months of 2013, gas consumption has grown by 3.9% . Evidence of consumption growth is further supported by lower US gas inventory levels in the year-to-date relative to the equivalent period in 2012.
| Inventory Level Falls Over 2013 |
|US Weekly Gas Inventories, Jan-July (bcm)|
We expect consumer sentiment to pick up as prices fall, and producers to respond by raising output levels to meet demand. However, consumer responsiveness to prices will in turn cap gains in the tug-of -war between consumers and producers for price control. From a technical perspective we do not foresee a spike in Henry Hub that would sustain prices beyond US$4/mnBTU through the rest of the year.
| Range-Bound Trading Expected |
|Front-Month Weekly Henry Hub (US$mn/BTU), 2008-Present|
2014: More Of The Same
In 2014, the same dynamics affecting demand and supply in the US market are likely to be sustained. Export restrictions will continue to keep the US market a relatively closed one. While the power sector will remain an erratic factor influencing demand for US gas, the industrial segment will help support prices at current levels as US manufacturing continues to pick up. However, industry is unlikely to significantly increase its demand to cause a severe tightening of the gas market, as large petrochemical projects that would require large gas quantities for feedstock would not come online until after 2015.
| Comfortable Balance To Remain Going Into 2014 |
|US Gas Production, Consumption & Imports (bcm)|
A cold and prolonged winter period poses an upside risk to our forecast, though we foresee that any gains would once again be capped by a possible power sector switch from gas to coal later in the year.
Towards the end of 2014, Henry Hub could begin to feel some upward pressure from new gas export capacity to Mexico as the first leg of Sempra Energy 's pipeline connecting gas from Arizona to northwest Mexico comes online. The first section of Pemex ' Los Ramones pipeline - which would eventually boost Mexico's total import capacity from 36.4mn cubic metres per day (mcm/d) to 95.2mcm/d - is also scheduled to start in late 2014.
Additional export capacity to Mexico could raise concerns about a tighter market. Indeed, Mexico has increasingly tap ped new supplies in the US as the latter's exports to its southern neighbour grew nearly 70% between 2008 and 2012. In the first five months of 2013, y-o-y pipeline exports to Mexico increased 22%.
| Piping To The Mexican Tune |
|US Gas - Exports From Jan To May (bcm)|
However, Mexican exports represented only 2.6% of total US gas production in 2012. With the new pipeline only coming into operation late-2014 at the very earliest, it is unlikely to make a dent on physical supplies as we expect producers to have sufficient spare capacity to respond accordingly to new demand. The upward price effect is likely only to stem from psychological reasons, owing to market expectations of supply tightening in 2015.
Thus , much of our expectations for a slight increase in Henry Hub in 2014 to US$4.05 /mnBTU has factored in bullish market sentiments towards the end of 2014 as it awaits major developments that would take place from 2015 that could increase demand for US gas significantly :
Further pipeline export capacity to Mexico as the second legs of Sempra's Arizona-Mexico pipeline and Los Ramones come online;
Start-up of large-scale petrochemical projects currently under being developed that will use gas as feedstock.
Therefore, 2015 could mark a turning point in Henry Hub prices as the market adjusts to a changing demand picture caused by rising domestic consumption and growing export capacity, which could see the beginning of Henry Hub's linkage to a wider global gas market.