Long-dated US Natgas price may rise to $5.50 per Mmbtu

Prices of long dated US natural gas may rise to $5.50 per MMBTU as productivity in many mature shale gas plays are no longer improving at the staggering rates of 2009-12. Output is falling fast in most areas like the Fayetteville or the Haynesville, according to Bank of America-Merrill Lynch (BofAML).

In an energy update, it said that despite the rise in associated gas production, a by product of crude rich plays, it is likely to fall far short of meeting the large pent up incremental demand over the next five years.

"To encourage producers to move back into high cost gas plays, we see long-dated US natural gas rising to $5.50/MMBTU. With long dated vols at 18%, options seem an attractive tool to hedge or capture this risk," BofAML noted.

Following a spike and pullback during winer months, prompt Nymex Natgas prices have rallied in recent weeks to encourage a faster build up in stocks which presents upside risks to BofAML's near dated forecasts. Lot of nat gas demand in the US power sector can move into coal, so prices have risen to the $4.70 to $5.00 levle where gas to coal swtiching is very significant.

"While near dated contracts in 2014 have surged, calendar 2015 and 2016 prices have only moved up modestly. As a result, prices are now encouraging coal burn near-term, but are not yet incentivizing a big ramp up in drilling activity across the country."
Source: Bank of America-Merrill Lynch (BofAML)