Wednesday, January 4, 2017

Here's Why Analysts Are Bullish On Gas Despite New Year Jitters

Rally from 2016 cut short on a warmer forecast for January; Some analysts see bullish case on Mexico pipelines, LNG export.

By Christine Buurma and Naureen Malik
January 4, 2017

Natural gas prices may have faltered in the first trading day of the year, but some analysts are still bullish on the outlook for 2017.

With demand for the power-plant fuel surpassing coal for the first time in the U.S. and exports soaring, a years-long glut from shale formations has finally been erased. Now, all natural gas needs is a good, cold winter.

Traders are watching closely to see how the commodity, which recorded its biggest rally in 11 years after stockpiles fell below their five-year average, holds up against a warm weather forecast running through Jan. 17, typically the coldest time of year. Tim Evans, an analyst at Citi Futures Perspective in New York, said he believes the stockpile deficit could even grow as winter plays out through the end of January and into February.

“Demand is up and supply is down," Evans said in a telephone interview. “It pays to watch the details of what we’ve got going on the supply side, on the export levels to Mexico and the exports of LNG.”

Gas futures on Tuesday plunged by the most in almost three years after forecasts released earlier for a deep freeze across the U.S. suddenly turned milder. Prior to that point, gas prices were expected to average $3.18 per million British thermal units, a 25 percent increase over 2016, based on median of 22 analyst estimates compiled by Bloomberg.

Still, Evans remains unfazed. “If we do get another cycle of cold this winter, say later in January or into February, then natural gas prices are going to go back on the upswing in a volatile fashion. This is what natural gas trading entails: we rally for three weeks and drop like a rock."

In 2016, gas deliveries to Mexico swelled by 31 percent from January through October year- over-year, to a record 1.1 trillion cubic feet, according to the most recent Energy Information Administration data. This occurred as Mexico deregulated its energy market, making it easier to develop pipeline projects to meet the demand of power companies seeking to switch to a lower cost, less dirty fuel.

In May, low-cost shale gas began heading south via Petroleos Mexicanos’s Los Ramones Phase II pipeline, projected to boost U.S. gas deliveries south of the border by as much as 22 percent, according to Bloomberg New Energy Finance.

“Forget about Mexico paying for a border wall," said Stephen Schork, president of the Schork Group Inc., an energy consulting company in Villanova, Pennsylvania. "They’re building pipeline infrastructure to import more U.S. gas. We’re finally getting around to a really robust demand scenario for U.S. gas supply.”

Meanwhile, gas cargoes from Cheniere Energy Inc.’s Sabine Pass terminal in Louisiana, which became operational in February, have headed to South America, the Middle East and Asia, the world’s biggest LNG market. More than half of U.S. LNG export capacity slated to be online by 2020 has been contracted to Asian buyers as a recent expansion of the Panama Canal cuts travel time to the region, according to Bloomberg New Energy Finance.

Domestic U.S. gas use is also on the rise. The nation’s power plants are burning record amounts of the fuel as coal-fired plants shut in response to environmental regulations and competition from cheap gas and renewable energy. New plants that produce fertilizer and methanol, used to make plastics and other chemical products, are also cropping up along the Gulf Coast, sending gas consumption higher.

While warmer winter temperatures will continue to be a major risk to a 2017 gas rally, shale supply also is a concern. Production dropped last year as drillers cut costs after prices tumbled to historic lows in March, but output has started to recover. The number of rigs drilling for gas in the U.S. has jumped more than 60 percent after sliding in August to the lowest in data going back to 1987, data from Baker Hughes Inc. show.

Still, the stockpile deficit won’t disappear anytime soon, according to Bank of America Corp.

“The U.S. natural balance is tightening rapidly on falling production and strong structural demand growth, especially from LNG export facilities,” Bank of America analysts led by Francisco Blanch in New York said in a note to clients Dec. 8. “Stocks will likely normalize by the end of this winter and then move to a large deficit by end of October, which may last well into 2018.”

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