Why Natural Gas Can Rise 75% By 2017

Morgan Stanley's Stefan Revielle said that the natural gas market is likely to return to a balance by yearend 2016, with a slowdown in supply and ample demand. He added that prices could exceed $3 in 2017, “well above the curve.”

“The next three months may be challenging as seasonal demand wanes, but we believe this will be a buying opportunity,” analyst Stefan Revielle wrote. Unlike oil, natural gas had faced bearish trends for several years, and prices were lowered to boost power demand. The market may rebalance, with supply growth moderating, and sufficient structural demand having been stimulated.

“At current levels, the 2H16 strip should generate too much gas power demand. As inventories normalize, focus should turn to the underlying balance, which is more constructive than prices suggest,” the analyst commented, while adding that 2017 prices could average $3.20/MMbtu versus the strip at $2.55/MMBtu.

Revielle expects demand to ramp up in 2017, backed by LNG, pipeline exports to Mexico and industrial plant completions. While mentioning that supply was “the most important variable” in bringing the market back in balance, the analyst added that supply was “clearly slowing.”

He noted the reasons for moderating supply as:

1. Limited incremental Northeast supply growth over the next 6 months
2. US oil production, and associated gas, finally showing meaningful declines
3. Record low activity in non-core shale plays should accelerate declines