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Raymond James Natural Gas Industry Update Summary (November 6, 2014)

Core Content

This report provides an update on the U.S. natural gas market, including storage levels, production trends, and price forecasts, based on data from the U.S. Energy Information Administration (EIA) and other sources. It also touches on fuel-switching dynamics and the outlook for natural gas prices in the short and long term.

Main Points

Storage Update

• The EIA reported a weekly injection of 91 Bcf of natural gas, which was above the Raymond James estimate of 88 Bcf and the consensus estimate of 85 Bcf.
• Total gas in storage now stands at 3,571 Bcf, compared to 3,801 Bcf last year, indicating a year-over-year deficit of 230 Bcf.
• The storage deficit decreased by 64 Bcf compared to the previous year's deficit of 294 Bcf.
• The front-month gas price fell $0.03 to $4.16 following the report.

Market Outlook

• The short-term and long-term signals are bearish, as the market is 2.9 Bcf/d looser compared to last year (adjusted for weather).
• Injections are expected to taper off in the coming weeks as colder weather begins to influence demand, leading into the withdrawal season.
• The current storage level is just over 3.5 Tcf, which is below the five-year average of 3.8 Tcf.

Next Week's Forecast

• The NOAA forecasts 106 TDDs for the week ending November 8, which is 7% below normal and 2.9% above last year.
• Based on this, next week's injection is expected at 37 Bcf, which would reduce the year-over-year storage deficit by 24 Bcf to 206 Bcf.

Key Data Tables

Weekly Injection and Storage Levels

Degree Days (TDDs)

Fuel-Switching Analysis

• Natural gas is not expected to trade in parity with oil in the near term due to limited fuel-switching capacity and non-global nature of natural gas.
• Residual fuel oil price spread (vs. natural gas) at the Houston Ship Channel was $7.94/MMBtu this week, increasing to $8.69/MMBtu when factoring in additional costs.
• Distillate price spread (vs. natural gas) was $13.30/MMBtu, widening to $13.80/MMBtu when considering the added cost of heating oil.
• NGL production for August increased 26 Mbpd sequentially and 430 Mbpd year-over-year, with growth driven by Eagle Ford and Marcellus/Utica shale plays.
• Ethane rejection is expected to continue due to processing economics, with an estimated 200-250 Mbpd of ethane being rejected.

Price Forecast

• Equilibrium price for natural gas is expected to be around $3.85/Mcf for the rest of 2014.
• 2015 gas price forecast is $3.65/Mcf, which is considered generous by the analysts.
• Long-term price forecast for 2020 is $4.25/Mcf.
• NYMEX Futures currently suggest a higher price than the forecast, possibly due to cold weather expectations, but the analysts caution that abnormal weather is not a reliable investment strategy.

Analyst Disclosures

• The report is prepared by Raymond James & Associates, a FINRA member firm.
• Non-U.S. affiliates are not FINRA members and are responsible for research in their respective regions.
• The report is not an offer to sell any security and does not constitute a personal recommendation.
• It is intended for U.S. investors only and not for distribution in other jurisdictions where it would be illegal.
• The analysts' compensation is based on research quality, stock performance, and support effectiveness, and is not tied to specific recommendations in the report.

Key Takeaways

• Storage deficit continues to shrink due to higher injections and milder weather.
• Production has been strong, with 5.13 Bcf/d growth year-over-year.
• NGL production is increasing, but ethane rejection is expected to persist.
• Natural gas prices are expected to decline in the long term due to increased supply and limited demand growth.
• Investors are advised to be cautious about weather-driven price fluctuations and consider long-term trends for more reliable forecasts.