Analysts: Low US gas prices, shale glut offer buying opportunity

By TIM LOH
Bloomberg

A supply glut that has kept US natural gas prices trading near a two-year low is a “buying opportunity” with the market set to tighten by the end of 2016, Societe Generale said.

Natural gas futures fell in April to the lowest since June 2012 as supplies continued to flow out of US shale formations, adding to already-high stockpiles.

Liquefied gas (LNG) scheduled to leave the US by tanker this year, exports to Mexico and demand from power plants will start eating away at that surplus, said Societe Generale, which recommended going long on gas for December 2017 delivery.

“The recent drop in longer-dated US natural gas prices represent, in our view, a buying opportunity,” SocGen analysts including Michael Haigh and Breanne Dougherty wrote in a note to clients Wednesday. “Catalysts emerge on both the demand and supply sides of the ledger that will challenge the overarching bearish pressure and potentially trigger bullish undercurrents” by the fourth quarter of 2016, they said.

The bank is bullish on dated gas contracts as Cheniere Energy prepares to start the first LNG export terminal to be placed into service in 46 years. More LNG projects in the works are set to turn the US into the world’s third-largest gas supplier by 2020, according to the International Energy Agency.

While US gas leaves for markets abroad, domestic supply is about to see a “dramatic slowdown” in growth next year, according to Societe Generale. The recent collapse in oil prices has hurt drillers’ cash flow profitability and their ability to service debt, it said.

“Our base-case outlook is for a negligible (1%) year-on-year increase,” the bank said. “We expect the prices of high demand months to trade at much bigger premiums once the market tightens.”

• Most Read
• Most Commented