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Barclays eyes $4/MMBtu this winter if storage drops rapidly

Thepace of natural gas storage withdrawal this winter should be quickened by lowerproduction and higher demand and drive the price of natural gas back toward$4/MMBtu, Barclays Research analysts said.

Theanalysts said that the month of October, when natural gas prices could fall dueto declining power burn and Sabine Pass maintenance, will provide the bestopportunity to establish a cash position before winter, when storage will bedrawn down at a pace 15 Bcf/d, above the five-year winter average of 13.3 Bcf/d.

"Infact, we expect this winter to bring the highest level of storage withdrawalssince winter 2013-14, which was the coldest of the past 10 years," analystNicholas Potter wrote in a Sept. 29 report.

Anticipatedstructural shifts in the gas market that will drive natural gas storage lowerprompted Barclays to hike its fourth-quarter price target to $3.05/MMBtu from$2.80/MMBtu and increase its 2017 target from $3.20/MMBtu to $3.34/MMBtu.

Thestructural shifts begin with natural gas storage that, as the result of asummer that was 10% warmer than the 10-year average and 18% warmer than the30-year average, drove Barclays to cut its end-of-injection-season storageestimate from 4 Tcf to 3.9 Tcf.

Followingthe warm summer and after a mild winter 2015-16, Barclays expects a more normalwinter 2016-17, andif weather trends colder than normal in December-February 2017, the market wouldbe supported by higher residential-commercial demand that the analysts believewill drive cash prices to $4/MMBtu.

Therising price of natural gas poses some downside risk to demand as coal becomesmore favorable for power burn. Barclays expects a drop in power burn of around8% in the first quarter of 2017, which would coincide with a year-over-yearrun-up in prices from just $1.99/MMBtu in the first quarter of 2016 to itsfirst-quarter 2017 forecast of $3.45/MMBtu.

"Anystickiness in power burn would add further bullishness to our forecast asend-March storage would approach 1.4 Tcf," Potter said.

Whiledriving demand, cold weather also poses production-side risk due to freezeoffs, as the geography of U.S. production shifted further north. Since 2010, theamount of U.S. natural gas produced in the Northeast has risen from 5% toaround 27% last year.

Northeastproduction in the Marcellus and Utica plays is expected to average 23.7 Bcf/dthis winter, a winter-on-winter rise of about 2.5 Bcf/d, supported by newpipeline infrastructure scheduled to come online in the fourth quarter. Intotal, takeaway capacity should be boosted by around 1.7 Bcf/d.

Butwhile the Northeast sees production rising and the backlog of drilled butuncompleted wells falling, incremental investment production in other regions,including the Midcon, Rockies and Gulf Coast, looks set to be broadly lowerthis winter.

Freeze-offscould combine with stalled or reduced production growth to offer greater pricesupport, Barclays said.

Overall,while production levels in 2016 were buoyed by strong first-quarter productionthat averaged 73.5 Bcf/d, second-quarter saw production drop 1.4 Bcf/d quarteron quarter to an average of 72.1 Bcf/d. Barclays expects production willaverage 72 Bcf/d this winter, the first winter-on-winter decline since 2009-10.

Theincreasing oil rigcount that currently stands at 418, up from a bottom of 316 in May,poses an upside risk to the production. The bulk of the rig additionshave been based in the Permian, where gas output has been holding strong ataround 6.8 Bcf/d. The increases in Permian associated gas output, however, arelargely being offset by larger declines in conventional production in EastTexas and South Texas, Barclays said.

Theincreasing oil rig count upside risk to production is expected to play out as a2018 impact, Barclays said.