Now that bid week pricing for the quarter is finished, Sterne Agee has updated its natural gas and oil prices and formally introduced 2016 estimates. Even though Henry Hub prices (the typical benchmark used for US natural gas) came in lower than Sterne Agee analysts Tim Rezvan and Truman Hobbs had expected they warn investors not to become too bearish in the future.

Sentiment driving price as much as fundamentals: Sterne Agee

“We believe sentiment is as much a driver of price action for natural gas as the underlying fundamentals of storage and demand, and the mild summer has muted much of the bullish sentiment for near-term pricing that originated in the winter,” they write. “We expect gas in storage to peak at 3.5 Tcf in early November, 6% below the average peak storage of 3.72 Tcf over the last eight years, which will drive heightened volatility in the event we see a typical or severe winter.”

Oil price deck

The $4.06/mcf price for the quarter was well below Rezvan and Hobbs’ $4.55/mcf forecast, and they are pulling back on other forecasts in response changing 4Q14 gas price from $4.65/mcf to $4.15/mcf and 2015 estimate from $4.50/mcf to $4.35/mcf. They have also introduced a 2016 estimate of $4.25/mcf, and adjusted their WTI and Brent crude forecasts down by about 1%. These changes are an acknowledgment that their previous 3Q forecast was too bullish, but investors should at least consider the possibility of another bad winter.

sterne agee energy price deck 0914

Increased natural gas production will be offset by exports

In addition to the effects of the mild summer, giving reserves a chance to catch up a bit after the harsh winter, Rezvan and Hobbs recognize that some investors might be concerned that the Appalachian bottleneck could be easing, which would put more pressure on prices. While that’s true, they point out that we will see a 2 Bcf/day increase in exports to Mexico in a couple of quarters and as much as 1.2 Bcf/d worth of liquefied natural gas exports in about a year. So any infrastructure improvements in the near term are going to be offset by growing exports, and prices shouldn’t be too soft as a result.

“Lower 48 production growth will keep climbing, but operators and midstream companies continue to find homes for these incremental gas molecules,” they write.

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