The tide might be turning for depressed natural gas prices in North America on increased demand and lower supply as more rigs are deployed to the oil side, according to a new report.
Draws on storage inventories and tightening supply are setting the stage for slightly stronger prices in the latter half of 2011 and into 2012, said Martin King, analyst with FirstEnergy Capital Corp.
"We think that the 'low' natural gas prices since late 2008, combined with the recently completed very strong storage withdrawal season, has set the stage for more of a sustained price improvement," King said in a report Tuesday.
The shift of rigs to more lucrative oil prospects likely will result in lower injections into storage, which is expected to fall during the summer on cooling demands, he noted. At the same time, demand for natural gas by manufacturers as a substitute for more costly coal has influenced inventories.
Storage levels in the United States at 3.8 trillion cubic feet -historically high -in November will not be enough to satisfy demand and keep prices low, he said.
"Going into the future, we are of the view that storage needs to fill to and probably surpass (4.0 tcf) in order to maintain an adequate storage cushion when entering the heating season," King said.
FirstEnergy is predicting current prices for natural gas futures -of $4.50 US per million British thermal unit to $4.90 US -could persist or increase over the year, and inch up in 2012.
The rise would erase the investment house's previous $4.00 US per mmBTU average for 2011 and $4.75 US average for 2012.
Natural gas prices in New York closed at $4.58 US, down marginally from $4.646 US on Monday as forecasts of milder weather eased concerns gas volumes would be diverted toward utilities to power air conditioning.
