Washington (Platts)--30Jul2012/309 pm EDT/1909 GMT

Natural gas prices will stay "stuck between a shale rock and a coal hard place" for the remainder of the year, Bank of America's commodities team said Monday in a note to clients.

While this spring's low natural gas prices touched off a remarkable 5.7 Bcf/d worth of fuel switching out of coal to natural gas, a move that has shrunk the storage build faster than it has seen in five years, Bank of America said, rising prices in this warm summer have power companies switching back to the coal stocked in their bins anytime prices get above $3/MMBtu.

"With US coal prices extremely low and with natural gas prices now trading above $3/MMBtu, the relative advantage of using gas to coal is disappearing," Bank of America said. "We are likely to see rangebound natural gas prices in the short term, capped to the upside by gas-to-coal switching and supported on the downside by coal-to-gas switching."

Bank of America is forecasting US natural gas prices to average $2.80/MMBtu in the third quarter, rising to $3.20/MMBtu in the fourth quarter and $2.70/MMBtu for the entire year of 2012. They predict a 30% rise by 2013 to average $3.50/MMBtu in 2013.

Coal will also benefit from a lack of discipline among gas producers who have not cut back production as much as they hinted during the spring, Bank of America said.

"Big producers like Chesapeake have cut output by much less than announced while other producers are still reporting production increases in the second quarter," Bank of America said, pointing out that Marcellus producer Range Resources of Fort Worth had a 10% increase in gas production from the first quarter to the second quarter of this year.

While gas rig counts are at a 13-year low, Bank of America isn't impressed.

"The total number of gas rigs operating bears no relationship anymore to the level of production thanks to superproductive shale plays like the Marcellus," it noted. "Production costs have fallen and the amount of gas that comes out of liquids plays at zero costs has increased again.

"With the 24-month strip already priced at $4/MMBtu, it is clear that prices have rallied to a point where a large chunk of production is economic, removing the strong incentive to curb production."

What may finally slow drilling and production is a glut in natural gas liquids as that commodity's market gets flooded. Slowing down liquids production will cut the production of associated dry gas coming to market, Bank of America said.

--Bill Holland, bill_holland@platts.com --Edited by Jason Lindquist, jason_lindquist@platts.com