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Analysts Revising 2013 Natural Gas Price Forecasts

April 22nd, 2013

OMAHA (Capstone Energy Services) – Colder than normal temperatures that persisted throughout the month of March for much of the eastern two thirds of the U.S. have now dragged into the middle of April and current forecasts from the National Weather Service project below normal temperatures to continue for the next week or more. This cold weather has caused larger than normal withdrawals from storage, bringing the winter season ending inventory balance below the five year average. Taking into consideration the exceptionally warm winter last year, the balance is still at the high end of the previous five year average. Nevertheless, futures market prices have responded to the reductions in storage as a potential shift in the supply situation, pushing prices up more than $1.00 per MMbtu or 32% since the 15th of February. Certainly, a significant amount of speculation or investment has been injected into these prices. In January 2005, the percentage of commercial traders (producers, merchants, processors and users) vs. non-commercial traders (swap dealers, managed money and other) with open contracts on the New York Mercantile exchange was 59% vs. 41% respectively. In the most recent report issued by the Commodity Futures Trading Commission (CFTC) last week, the percentage was 29% commercial and 71% non-commercial.

This recent sharp increase in prices has changed many analyst views on the average NYMEX price for 2013, in part because the higher than expected prices in the first few months and in part because of a shifting view of the pricing for the balance of the year. Some of these projections are as follows:

                                                 April           Previous
• EIA – Short Term Outlook         $3.52          $3.41
• Stephen Smith and Ass.           $3.90          $3.67
• Morgan Stanley                        $3.93          $3.66
• Tudor Pickering Holt                  $4.00          N/A
• Wells Fargo                              $3.71          $3.35
• Goldman Sachs                         $4.40          $3.75
• Raymond James                        $3.85           $3.25

The average price of these 2013 annual projections is $3.90. The actual NYMEX average settlement price for January through April was $3.50, meaning that the balance of the year will need to average $4.10 in order to meet those projections. The current May to December forward price curve averages approximately $4.31 per MMbtu, which suggests that there will need to be a number of months that will have pricing below where they are today. Furthermore, if it is assumed the early winter months will be at current levels or higher, then it is logical that the swing months of spring and fall could be much lower.

Cold weather this spring has shortened the “window” for a significant price decline before summer cooling demand begins. The short time frame will directly affect the extent of any correction that will take place, if one does. Technical factors still point to a price “top”, but no material price reversal has materialized over the last few weeks. It will likely take a fundamental “trigger”, such as a surprisingly strong storage injection to begin a speculative sell-off. If that does not occur in the next 30 days or so, anticipation of summer cooling will limit the downside until the extent of this summer’s cooling load is better understood.

_____

By Ed Freeman

Glossary Terms

Glossary Terms

Nominated Volume

The physical quantity of gas requested, typically in MMBtu/day, for a specific contract or for all contracts at a specific point.

Marketing Affiliate

A marketing company that has corporate ties to an interstate pipeline, an intrastate pipeline, or a local distribution company.

Energy Only Providers

Power marketers or other electricity vendors who provide and bill for only the energy component of the electricity consumed by the end-use customer.

Therm

A unit of heating value equivalent to 100,000 British thermal units (Btu).

Real Power

The component of electric power that performs work, typically measured in kilowatts (kW) or megawatts (MW)--sometimes referred to as Active Power.

Injection (Storage)

The process of delivering natural gas into a storage field for future delivery and use.

Price Ceiling

Statutory maximum lawful prices for various categories of natural gas, including gas destined for both the intrastate and interstate markets.

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