With the problem of outsized production and storage oversupply diminishing, a new report by Simmons & Co., Houston, projects that 2013 will be a better year for natural gas. Pricing should improve, as sub-$3 prices fade away “in the rearview mirror” of 2012.

The report predicts a natural gas price range of between $3.50 per thousand cubic feet (Mcf) and $4.50 per Mcf long term, compared with the current Nymex Cal 2013 of $3.75 per Mcf and a Cal 2014 of $4.10. The Energy Information Administration estimates an average price of $3.34 per Mcf for 2013.

Despite a 50% decline in the gas rig count since October 2011, the report still predicts growth in production next year, because of gas associated with crude oil production. Still, Simmons predicts growth at a much lower rate than in previous years. In 2013, growth is projected at 1%, compared with 3% in 2012 and 8% in 2011.

Because of the importance of associated gas in the report’s model, the most important variable to watch next year will be the price of oil.

“Given the importance of associated gas to our forecasting, gas production growth is largely dependent on the price of oil remaining robust (WTI> $85 per barrel),” according to the report. In a $70-per-barrel scenario, the report predicts a 20% reduction in the oil-directed rig count next year, while the rig count would remain flat in an $85-per-barrel scenario. “The quickest way to reduce gas supply is for oil prices to decline below $80 per barrel for a sustained time period, thereby resulting in E&P’s reducing capital spending due to cash-flow constraints.”

The projections could end up being conservative, however, as drilling efficiency grows.

The report also anticipates a growth in residential/commercial demand early in 2013. Last year’s mild winter resulted in a drop of nearly 1 trillion cubic feet (Tcf) of gas demand between November and March. Assuming a normal winter, residential and commercial demand for natural gas will increase by 2 billion cubic feet (Bcf) per day, according to the report.

The news is even better in terms of power generation.Simmons expects gas demand for power generation in 2012 to be 25.4 Bcf per day, a 22% increase over 2011. The reason for the dramatic increase is due to gas gaining share from coal because of low prices. In fact, the report estimates there’s been a 5 to 5.5 Bcf increase per day of coal-gas switching in 2012 over last year. Some of this switching is expected to reverse in 2013, however, according to the report, “Should gas be able to hold onto its share of coal-fired generation, even at higher gas prices, this would prove to be tremendously bullish for the gas market.”

Thus, how much share gas holds onto or gives back to coal will be watched “very closely” next year.