
Market forces will someday rebalance natural gas prices, but not until 2021. (Source: Hart Energy/Shutterstock.com)
The outlook for natural gas prices, at least over the next year or so, is bleaker than it has been in decades, according to a recent report from IHS Markit. A driving factor in the firm’s forecast is oversupply from the Permian Basin.
Pipeline infrastructure that is coming online is expected to unleash associated gas from the Permian Basin’s vast oil production, overwhelming the market and pushing average Henry Hub prices below $2 per million British thermal unit (MMBtu) for 2020, the IHS analysts said. This would be the lowest average price in real terms since the 1970s, and in nominal terms, since 1995.
Demand is not the culprit. In fact, IHS noted domestic demand for natural gas is robust, having increased by an annual average of 14 billion cubic feet per day (Bcf/d) since 2017, while exports present another market for an additional 3 Bcf/d of LNG that is forecast for 2020.
The problem is that abundant U.S. production has more than matched demand growth with an additional 14 Bcf/d since January 2018 and an average of more than 90 Bcf/d forecast for this year and next. Further, the Permian added supply is expected to match or exceed LNG export potential.
“It is simply too much too fast,” Sam Andrus, executive director at IHS Markit who covers North American gas markets, said in the report. “Drillers are now able to increase supply faster than domestic or global markets can consume it. Before market forces can correct the imbalance, here comes a fresh surge of supply from somewhere else.”
The Gulf Coast Express pipeline, which was scheduled to come online in October, will allow for an additional 2 Bcf/d production capacity from the Permian, the report noted, with an overall basin capacity increase of 6 Bcf/d through 2022.
“In all events the gas is going to get produced out of the oil well. The real change here is the transportation capacity,” said Michael Stoppard, chief strategist for global gas at IHS Markit. “You go from a situation where producers, in many cases, were paying someone to take their gas to having an economic means of getting it to market.”
The IHS analysts said that price shifts are already underway.
“Gas prices fell by more than a $0.60/MMBtu between March and August as inventories climbed towards their five-year rolling average—despite record use of natural gas to generate electricity and growing LNG exports,” the report found. The forecast is for U.S. Lower-48 storage inventory to emerge from this winter “at 2.1 Tcf [trillion cubic feet]—or 263 Bcf higher than the rolling five-year average—and head towards 4 Tcf in the fall of 2020.”
Market forces will someday rebalance the market, but not until 2021, when they could average $2.25/MMBtu, according to the report.
“What is unique here is the extent of reduction required,” said Shankari Srinivasan, vice president of energy at IHS Markit. “But signs still point to this coming price fall having a limited shelf life rather than being the new normal.”
Recommended Reading
Southwestern Energy Plans Oil, NGL Growth as Gas Prices Slump
2023-04-05 - With U.S. natural gas prices down more than 50% from last year, Southwestern Energy is pivoting capital to its liquids-rich footprint in Appalachia.
Citizen Energy's Case for the Midcontinent
2023-05-25 - In the shadow of the Permian Basin, Citizen Energy, an Oklahoma company busy in the Anadarko Basin, portrayed itself as a “great target” at SUPER DUG.
Family Behind Stronghold Energy Raises $500MM for Permian Deals
2023-05-31 - After selling Stronghold Energy II to Ring Energy for $465 million last year, Steve and Caleb Weatherl aim to develop another Permian position with their new E&P, Garrison Energy.
Analysts: Callon’s $1.1 Billion A&D Aids Debt Reduction, Investor Returns
2023-05-09 - Callon’s exit from the Eagle Ford Shale will refocus the E&P as a Permian pure-play and should help reduce debt and return capital to investors, analysts say.
Haynesville to Lead Gas Production Growth in 2023
2023-03-30 - Enverus expects the Haynesville to lead gas production growth in 2023 and then fall thereafter before growing again between 2025 and 2027, Bernadette Johnson, the firm’s general Manager, said at Hart Energy’s DUG Haynesville conference in Shreveport, Louisiana.