Event
Maintaining long-term natural gas price of $6.50 per mcf. Reducing
'10 gas to $6 from $6.50.
Key Points
• Dominant theme in the market is that of a cyclical recovery. As a
result, the market will dismiss conventional indicators. The market
will shrug off a nasty hangover from a weak economy and one of
the mildest summers this decade. The market will shrug off a
massive and chronic inventory surplus. Instead the market will
focus on a shrinking storage surplus this winter as evidence that a
cyclical recovery is underway – even if that leaves us with record
inventories heading into the summer of 2010. Bullish sentiment will
find support in better storage withdrawals early in the winter
season, compared to a year-ago. The challenges arise in the
second half of winter.
• We believe the hangover will be difficult to shake in spot prices. As
a result, we are lowering our 2010 natural gas forecast to $6.00
from $6.50. Real-time demand indicators are weak and weather
comps are difficult. Positive developments on the supply side will
help but not cure the storage overhang. Net result is potential for
record storage exiting the winter. However, the surplus of 155 bcf
will be much less than a beginning surplus of 400 bcf.
• Maintaining our long-term forecast of $6.50, which reflects a 10-12x
parity to crude prices long-term. As the y/y storage surplus shrinks,
natural gas will escape the orbit limited by coal/gas displacement.
Eventually, the average price of natural gas will be determined by
peak prices (6-8x parity) and trough prices (~ $4 required to
displace coal). The 10-12x parity is significantly lower than historical
averages, as gas has destroyed liquids as a competitor in the
power sector.