US Natural Gas: warm winter fear!

Morgan Stanley Research -

Warm winter fears, growing supply and full storage concerns have driven a steep fall in US natural gas prices that are now within 8c of the April 2012 low

With prices unlikely to sharply recover during 2016, we outline the companies most exposed to US gas.

US gas prices fell steeply during late 3Q to near recent historic lows. US natural gas prices averaged $2.75/mmbtu during much of 1H15. However, prices fell steeply during late 3Q with prompt month prices averaging just $2.32/mmbtu. Moreover, physical cash price weakness has been even more acute, with Henry Hub falling below $2/mmbtu this week, or just 8c above the April 2012 low. Weak near-term pricing has extended throughout the curve, with prices expected to remain below $3/mmbtu until 1Q18.

Warm winter fears and full storage exacerbating weak fundamentals. Lower gas prices stimulated coal-to-gas switching, which more than offset high supply growth. However, a much warmer than normal Autumn has pushed end of season inventory targets to record levels of 4.0 Tcf, or ~400 Bcf above last year. More recently, bearish sentiment has intensified due to the imminent Marcellus/Utica debottlenecking and fears of the strongest El Nino in 20 years that threatens to severely impact winter heating demand.

Prices are forecast to remain challenged during 2016 in any weather scenario. Even assuming a normal winter, we think a short, sharp US gas price recovery is unlikely. However, slowing gas supply and growing demand throughout 2016 could drive prices higher by 2017. While we forecast prices to recover to $3.75/mmbtu by 2017, we see upside as limited due further Marcellus/Utica debottlenecking.

Who’s most exposed to US natural gas prices? Exxon and Chesapeake have amongst the largest US gas production portfolios. However, relative to the size of their overall gas portfolio, Chesapeake and Anadarko have the greatest relative exposure. Of the European oils, Repsol is the most exposed with 45% of its gas production portfolio exposed to US gas prices, followed by BP at 28% and lastly Statoil at 16%.