Bank of America Merrill Lynch continue to believe the market will tighten gradually as US natural gas production is rolling over in response to rig count declines and low oil, NGL and natural gas prices. Over the past year, total gas rigs have fallen by one-third to the lowest on record and already production has flat lined this year. Sequentially, the declines will continue well into next year, and will be visible on a YoY basis by 2Q16.

"For all of 2016, we project a 0.3 bcf/d contraction in domestic gas output in the United States."

Forecasts: we bring down our US nat gas forecast to $3.50

BofAML recently cut their NYMEX US natural gas average price forecast for 2016 from $3.90/MMBtu to $3.50/MMBtu to reflect a falling cost structure and persistently high inventory levels.

“|Even then, we still see production dropping sequentially over the next 12 months, and project US total dry gas output to average 73.6 bcf/d in 2016 against an average of 73.9 bcf/d in 2015 and 70.4 bcf/d in 2014. “

As a result, our forecasts remain 50 cents/MMBtu above the current forward, reflecting an expected pick up in prices particularly into 2H2016.

Risks: higher prices to balance supply and demand

BofAML projections reflect their belief that US natural gas demand will be very strong. This robust outlook is partly the result of thermal coal plants being retired across the country at a pretty rapid clip over the next 18 to 24 months.

But most importantly, the bank's constructive assessment on NYMEX natural gas prices relies heavily on what they expect to be a bumper year for US nat gas exports.

Combined, American gas sales to Mexico via pipeline and to the rest of the world via LNG (see Illiquid gas) will expand at the fastest pace ever against a constrained supply picture. “Higher prices, in our view, will have to bring supply and demand into balance next year.”
Source: Bank of America Merrill Lynch