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Low crude oil price could support natural gas back to $6/MMBtu by 2019, analyst says

Ifcrude oil prices stay below $50/bbl for the next three years, natural gasprices could recover back above $6/MMBtu, Macquarie Group's global oil and gasstrategist Vikas Dwivedi said.

"Crudeoil is so important to what happens to natural gas as you think about gas risksand opportunities," Dwivedi said during a presentation at the LDC GasForum Southeast in Atlanta on April 12.

Atthe lower crude oil price, associated natural gas production is not growing,and without the free gas from oil production, the natural gas market will turnbullish as the market faces challenges on the supply side from acceleratedlegacy gas declines, the extreme drop in the gas rig count and the lack ofdemand pull from the Northeast, which should result in lower Utica/Marcellusproduction.

Theoil market will likely rebalance and prices could get back to $70/bbl, whichwill produce growth and reproduce associated gas and drive NGL wet-gaseconomics. "But if we can see it stay in the $70 range, maybe go below$70, that is still very positive for natural gas prices because previously wehave had gas production grow 5 Bcf [per day] to 6 Bcf per day while rig countsand prices were falling," the strategist said.

Naturalgas production became "an independent variable that didn't care aboutanything else, it was just going to grow," Dwivedi said. "That is agreat recipe to have low prices."

Butthat may be changing. Natural gas production remains resilient, hovering around71 Bcf/d, but after the February surge in production, dry gas production isslowing and legacy gas production is expected to continue to decline due to anexceptionally low number of rigs, he said.

"Marcellus/Uticahas been the monster, it was 0 Bcf/d a few years ago and is now about 22[Bcf/d] to 25 Bcf/d," Dwivedi said. "If we didn't have this in gas,the price wouldn't be at $2/MMBtu; it would be much higher," he said.

Althoughthe takeaway capacity from the plays is still pretty big and there is still moreroom to grow, Dwivedi questioned whether there will be enough interstatepipeline capacity to take it away and be able to grow production. "That isgetting more and more challenging as pipeline projects are getting delayed,cancelled or deferred," he said.

Naturalgas volatility has been very low, but going forward a lot is changing, Dwivedisaid.

Fromthe demand perspective, coal-fired power plants are retiring in a massive waybecause of legislation and economics. Macquarie anticipates power burn to increaseyear on year at the high end from 2.0 Bcf/d currently to 3.0 Bcf/d.

"Thereis renewables growth because of subsidies, but it is getting more economic on astandalone basis and the amount of solar on the way is just massive, so thathurts gas demand as a daytime source, but more gas fired generation will beneeded to back solar up," Dwivedi said.

Additionally,pipeline exports to Mexico are seen growing year on year from 1.8 Bcf/d to 2.5Bcf/d, and could be near 4 Bcf/d further out, the strategist said. Exports willbe accelerated by delays on the Mexican side with getting plants built and withproduction slowing.

LNGexports from Sabine Pass will add to the demand-side challenges as they are onthe way from 0.2 Bcf/d to 1 Bcf/d this year. "Through 2020, LNG exportdemand will be big," Dwivedi said. The economics work to send LNG toglobal markets because of the nature of contracts and Macquarie sees exportsclimbing to 6 Bcf/d at least.

Macquariealso expects improvement in industrial demand, which should rise 250 MMcf/dyear over year in 2016, but manufacturing indices are worrisome, Dwivedi said.

"Sobe ready for a more volatile gas world than we have gotten used to in the lastfew years. It doesn't anymore have to be just from weather," he said.

Interms of weather, last winter destroyed about 1,000 Bcf of demand. "A mildwinter should not destroy more demand than a cold winter would have generated,"Dwivedi said. The "freakishly mild" winter leaves a lot of demandbuilt into next winter, he said, which could catch the market napping.

"Thereis a lot of complacency since we finished March with such a high inventorylevel. But if demand numbers prove right and the supply doesn't grow, theday-to-day market will be much tighter and this massive amount of inventory maynot do a lot to keep prices from surging. "

Naturalgas storage will also be a risk factor with no new additions to storagecapacity. There will be as much storage capacity in five years as there wasthree years ago and over that time we have added about 20-25 Bcf/d productionin the end. "When we look at that we see a lot of volatility,"Dwivedi said.

Goingforward, Dwivedi sees natural gas prices rising to the high to the low $3s onaverage, but the real story is the volatility. "Natural gas will be themost volatile commodity in the market," he said. "The range ismassive from $1.50 to $6.50."