US natural gas prices will face further weakness this summer as ample inventories and high production put pressure on prices, a new report by BofA Merrill Lynch said.Merrill Lynch have an end of 2Q15 target of $2.25/MMBtu and a 2015 average forecast to $2.85. Next year the bank expect prices to recover as the market rebalances, and forecast nat gas prices to average $3.90/MMBtu in 2016.

Rapid growth in shale gas supply has resulted in fast US inventory builds, pushing prices below $2.45/MMBtu at the end of April. Despite the strong injections, prices have picked up steam and have now bounced up from the lows.

“ Near-term, we still see prices moving lower again on economic headwinds, weak industrial natural gas demand, and ongoing production gains. Ultimately, prices have to balance at a level where demand from power generation absorbs all this additional production, and we even see downward pressure on summer-winter spreads in the coming months,” BofA Merrill Lynch said.

On the back of this, the US nat gas market should tighten rapidly in 2016. Though the prospect of a high end-of-October storage number will likely keep prices capped near-term, the market is set for a fundamental U-turn next year.

“We expect NYMEX futures to rally in 2016 and slow gas demand in power generation.”

“By end of March 2016, inventories should sit below the 5-year normal, and we stick to our average 2016 forecast of 3.90/MMbtu. Still, we acknowledge that further strength in WTI and a potential return of associated gas output may pose downside risks to our forecast,” according to the report.
Source: BofA Merrill Lynch