Natural gas prices could reach $4.50/MMBtu in 2017 – Ponderosa Energy analysis

Sharp increase in natural gas prices needed to incentivize production growth given the weak crude oil prices

In “Natural Gas Leads The Way”, Ponderosa Energy Integrated Analytics expands on the $4.50/MMBtu natural gas price forecast for 2017 theme they presented in May.

Two key dynamics continue to support a sharp increase in gas prices: current crude price environment ($50/bbl) and structural demand growth in the natural gas market.

Short term (4Q2016 and 2017) implications:

1) Oil market continues to suffer from too much supply and lagging demand. Prices expected to remain below $50/bbl on average for the balance of the year.

2) $50/bbl crude price and the current forward strip for natural gas are insufficient to elicit significant associated gas production to maintain growth once production from DUCs declines.

3) If natural gas demand grows as expected, natural gas prices must rise, to $4.00 on the bottom end and perhaps even as high as $4.50 in 2017.

Ponderosa Energy conclusions:

• The oil markets remain long. Global production continues to grow faster than global demand and stocks continue setting record high levels every week. WTI prices are projected to average $52/bbl in 2017. This crude price has implications on natural gas production growth.
• The gas market is unbalanced, but not for much longer: Lower crude-directed drilling is slowing associated gas production and the current rig count hovering near 588 is not enough to keep gas production flat next year.
• Current forward curve (oil AND gas) does not support natural gas production growth and a normal winter will push prices north of $4.00/MMBtu.
•  DUCs and high storage inventories can supply incremental winter demand in 2016, but once these are depleted, economics (gas prices vs producer breakeven) will define 2017 drilling activity.
• A La Niña weather phenomenon will lead to a stronger-than-normal winter and set forward the short position of the gas market.
• A sharp increase in natural gas prices is needed to incentivize production growth given the weak crude oil prices. Ponderosa forecasts 2017 average prices of $4.50/MMBtu.
• The NGL market: Demand for ethane is increasing with additional export capacity.
• Ethane frac spreads are narrowing which will incentivize more ethane recovery.
• NGLs prices are expected to go up in 2017, in line with natural gas.