Natural gas has dominated headlines this week after a
New York Times article called the market “some sort of ponzi scheme, even Enron-like,” according to Forbes colleague
Christopher Helman.
Goldman Sachs seems to view the industry bullishly, reversing its short on U.S. nat gas futures and providing further long-arguments for global nat gas markets.
While not fully bullish, Goldman’s commodities research time suggested closing its close position on October 2011 NYMEX nat gas contracts, which it opened only two weeks ago and has returned 10.5% since then. (Read Chris Helman’s piece,
New York Times Is All Hot Air On Shale Gas).
Nat gas prices will average $4.00 per mmBtu in the coming three months, and $4.25 per mmBtu n both the next 6 and 12 months, according to their estimates, revealed in a note published by
ZeroHedge.
“Prices have corrected in line with our expectations,” analysts said, adding “we also see increased support from higher coal prices going forward,” allowing for a “coal-for-gas substitution at a higher price level.” Goldman still sees medium term weakness in U.S. markets, with growing shale production still the strongest force in the market.
Still, while supplies will continue to grow, they will be offset by greater demand. A “structural overhang of supply” will continue to put pressure on prices, “crowding out conventional production and imports.” But adjustments on the demand side from “increasing generation, industrial and export demand,” along with coal prices, balance risks and make the case for closing the short position.
As mentioned above, higher coal prices support nat gas prices by allowing for a higher coal-to-gas substitution price. Goldman’s outlook for coal prices has been improved on good prospects for U.S. thermal coal exports. Their CAPP coal price forecast has been increased to $75 per ton, or $5.60 per mmBtu gas-equivalent.
The other major recommendation was a reiteration of their view that global liquefied natural gas (LNG) markets have come out of two years of cyclical, as opposed to structural, surplus and will begin to tighten.
The global gas market has been divided into two distinct markets with the U.S. marked by structural surpluses which will persist and the rest of the world, “where prices are moving closer to oil-indexed natural gas.” The cyclical downturn in demand outside of the U.S. has “ebbed” as events in Japan, with a tsunami and ensuing nuclear incident at the Fukushima Daiichi plant, and Libya, with Colonel Muammar al-Gadhafi battling rebels and NATO, have put pressure on energy prices. (Read
Goldman’s Other Bullish Calls: Gold, UK Nat Gas, Soybeans).
Given the passing of a wave of new liquefaction facilities, with LNG production at levels “that could be absorbed by the market and no more,” any growth in demand will feed directly into prices. Therefore, Goldman’s research time suggests longing UK natural gas via Q4 2012 ICE UK NBP nat gas contracts. (Read
Goldman Playing Oil Like A Fiddle: Calls Bullish Structural Shift).