The top natural gas analyst at Jefferies raised his 2014 gas price forecast 8% Thursday, citing a much higher than anticipated winter price in the first quarter and the end of coal's ability to keep gas prices range-bound.
"The era of too much of everything, too much coal, too much gas, is over," Jefferies analyst Subash Chandra said in a note to clients as he raised his 2014 average price forecast from $4/Mcf to $4.30/Mcf at the Henry Hub.
Chandra raised his second and third quarter calls 25-cents to $4/Mcf and kept his fourth quarter prediction constant at $4.25/Mcf.
He pegged prices at the Henry Hub over the winter of the first quarter at $4.95/Mcf. Platts assessed first quarter cash prices at Henry Hub at $5.15/MMBtu.
Chandra expects gas in storage to end the injection season at between 3.3 Tcf and 3.4 Tcf, well below the five-year average.
"Utilities will have to make difficult choices this summer," Chandra wrote. "They can either burn coal at historical levels and experience massive drawdowns in coal inventories or preferentially burn gas and run the risk of being short this winter."
"In either case we believe gas prices benefit."
"Signs from this winter are that coal burn is below where it should be based on prior-year behavior. Gas demand benefited. This is one of the main reasons why year-over-year gas inventories are at almost a 900 Bcf deficit," Chandra said. "Winter weather gets too much credit."
"Coal use has been 15% to 20% lower than in prior years when power demand and weather was nearly identical," Chandra said.
Coal production is roughly 19 million short tons and Jefferies is predicting 17.2 million/st of coal burn this summer, not enough of a difference to rebuild coal stockpiles which Jefferies expect will end the injection season at between 105 million and 110 million/st, the lowest level in 10 years.
"We believe the reluctance to burn coal, partly because of low stockpiles, will continue to affect summer behavior," Chandra said. Natural gas is the most immediate beneficiary."
"The long awaited decay in the coal sector is now at hand," Chandra said, with 3% (9.3 GW) of the US' power capacity lost in the last two years with another 20% of retirements (60 GW) expected by 2020 as new emissions regulations take effect.
Increased gas production "won't come to the rescue" this year, Jefferies said, because the growth is in the Marcellus Shale where takeaway capacity doesn't increase until the second half of the year.
Another wild card, Jefferies said, is weather, specifically an El Nino event in the Pacific.
Currently, the National Oceanic and Atmospheric Administration's three- month outlook calls for a summer 5% hotter than the 30-year normal, but still cooler than the five-year average.
"The main risk to the cooling season is El Nino - the summer will shift much cooler if it develops at a quicker pace over the next few months," Chandra said. "The forecast could be dramatically cooler if El Nino is in place by May. In fact, the entire US could be 1% to 2% cooler than normal during the critical summer months of June through August is a strong El Nino was to develop by May."
