Natural Gas Prices Could Double Next Year
by Nicholas Newman Rigzone Contributor Friday, May 15, 2020
The EIA expects rising gas prices this fall, in line with higher winter demand for heating and a revival of industrial activity.
April has seen a marked reversal of fortunes for shale oil drillers in the United States. The price for May deliveries of West Texas Intermediate crude briefly dropped to minus $40.32 per barrel on 20 April,[i] before rebounding to over zero. For the first time ever, traders were paying to have crude taken off their hands. The supply glut, combined with fears of limited storage space in Cushing, Oklahoma running out, is crushing the shale industry. The record low gas price, not seen since December 2009, mirrors oil since 40 percent of America’s natural gas production is associated gas derived from oil production.
Reasons for the current low price of natural gas
Even before the current crisis, natural gas prices were unusually low at just $2.33 in December 2019,[ii] as supply greatly exceeded demand thanks to a mild winter, a slowdown of economic growth in the U.S., China and the rest of the world as well as a glut in liquid natural gas thanks to new export projects coming online in the U.S., Africa and Australia. The arrival and spread of COVID-19 is turning things from bad to worse. “U.S. electricity demand is beginning to rapidly decline due to coronavirus-related containment measures” [iii] states Andy Weismann, CEO of EBW Analytics Group on an industry website. And, since electricity consumption is now a major driver for gas usage in the U.S., demand for gas has fallen.
Well operators are cutting back on drilling
Crude oil prices look subdued for the coming year according to industry observers. By contrast, some analysts expect natural gas prices to rise by the fall for, in response to low crude prices, an increasing number of E&P companies are being forced to cut activity and reduce drilling budgets by between 30 and 50 percent. This is already being mirrored in a reduction in new fracked well-starts from 780 in January to just 162 in April 2020, according to recent statistics from Rystad Energy, April 2020.[iv] The U.S. government’s own estimates show output falling by 660,000 barrels per day by next year, from a peak of 13.2 million barrels a day. As crude output declines so will natural gas output and the price of the latter will rise.
The price of natural gas could double
The EIA’s April note forecasts rising gas prices in the autumn, in anticipation of higher winter demand for heating and a revival of industrial activity. [v] At the start of April, gas was priced at just $1.64 per million British thermal units (MMBtu), the lowest it has been since December 2009. Goldman Sachs analyst Samantha Dart expects gas prices to jump to $3.50 / MMBtu gas by winter 2020-2021 and reach $ 3.25 / MMBtu by summer 2021. Bank of America concurs but puts the rise to just $ 2.45 / MMBtu in 2021.[vi]
Impact of higher gas prices
The impact of higher natural gas prices could prevent hundreds of debt-laden small independent producers across Texas and the Midwest, who account for 83 percent of oil and 90 percent of gas output, from going bankrupt or shutting wells.[vii]
The return to better natural gas prices could incentivize E&P companies to reduce flaring and venting of gas and sell this higher valued commodity to local buyers. The upcoming completion of several gas takeaway pipelines will also open access to Gulf coast LNG processing plants and gas-hungry Mexico. At this juncture, as one industry observer put it, shale oil producers should regard natural gas as their main source of income in coming months and oil as a by-product. Adding, tongue-in-cheek, perhaps crude oil should be renamed associated crude oil?
This would be amazing!!! Any thoughts as to the chances of it happening?
Watch the price of oil. For a doubling of natural gas prices to occur, crude prices will need to remain depressed for another month or two, at least. How many oil-focused companies will go bankrupt over that time? Will the economy recover quickly, spiking demand and materially increasing crude prices? Or will it be a slow recovery with gradual increases in demand? Will there be a second virus wave over the summer? A third in the fall? Lots of moving parts to get to where this pundit thinks we are headed. For a doubling of natural gas prices to occur, I'm afraid several not so positive events must take place.
At this point, I would guess the chances are 50/50.
Even $2.50 would be a wonderful thing...best hopes!
In the latest Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) forecasts that decreases in natural gas consumption in the United States in 2020 will be driven by declines in natural gas used in the industrial, commercial, and residential sectors. In the U.S. electric power sector, EIA forecasts natural gas consumption to decline in the second half of 2020 after growing in the first half of the year.
EIA expects domestic consumption of natural gas in 2020 will fall 3.4 billion cubic feet per day (Bcf/d) compared with 2019, led by a 1.6 Bcf/d decline in industrial natural gas consumption. EIA forecasts lower overall U.S. consumption in 2020 because of reduced economic activity related to the impact of the 2019 novel coronavirus disease (COVID-19) and milder-than-normal temperatures in the first quarter of 2020 that reduced demand for space heating in buildings.
In 2020, EIA expects natural gas consumption in the residential and commercial sectors to decrease by 3.7% and 6.9%, respectively. Warmer weather in the first quarter of 2020 was the largest contributor to falling residential and commercial demand; combined residential and commercial demand was down 5.6 Bcf/d in the first quarter of 2020 compared with the first quarter of 2019. January 2020 was the fifth warmest January on record and had 15.3% fewer heating degree days (HDDs) than the 10-year average, a contributing factor to lower demand for the quarter.
Residential and commercial demand account for a small fraction of U.S. natural gas consumption outside of winter months when heating demand is high. However, EIA expects weaker economic conditions in the coming months to further reduce average 2020 natural gas consumption in the commercial sector.
Weak economic conditions also contribute to lower industrial natural gas demand, which EIA expects to decline in the United States from an average of 21.4 Bcf/d in 2019 to an average of 19.9 Bcf/d in 2020, the first time it has dipped lower than 20.0 Bcf/d since the summer of 2016. EIA forecasts that the natural gas-weighted production index, which estimates manufacturing activity based on subsectors of the manufacturing industry and their relative importance to total natural gas consumption, will fall 15.3% between January 2020 and October 2020. If this forecast materializes, the natural gas-weighted production index is forecast to reach its lowest point since 2009.
In the first half of 2020, EIA expects natural gas used for electric power in the United States to grow 1.6 Bcf/d compared with the first half of 2019 because of low natural gas prices and lower-than-expected natural gas capacity additions. However, EIA forecasts U.S. natural gas consumption during the second half of 2020 to decline 2.2 Bcf/d compared with the second half of 2019. EIA forecasts rising natural gas prices in the second half of 2020, which will drive down natural gas consumption for electric power.
I have read of many hopes. There have been many glowing predictions this past decade. One shaler’s moniker was hopeful about natural gas. He ended up selling his mineral rights a couple of years ago. Que sera, folks.
Hope is a poor metric upon which to base important financial decisions.
But it does Spring Eternal
LOL! As does the boom and bust nature of the business. One of these days a bust will not be followed by a boom.
Yes, Mr Powell and The Fed will have a limit. At the same time, renewables have a future.
Historically, Oil and Gas have been terms usually used together when talking about that business. It seems now that there is more separation of the terms in today's world.
The OPEC / International network and issues impact the oil market while gas doesn't have anything like that to impact its pricing and marketing.
Gas is still impacted by international issues with all the LNG and huge gas fields around the world, but it seems as if it is not as "hammered" as its liquid hydrocarbon relative.
Just my opinion as always.
PS - I am still waiting to see how JJ / Comstock parlays their recent business moves into what share of the future gas / LNG market they will attain. May take a few years but I think it is coming!
Jerry Jones? I sure would separate hope from that name. Talk about clutching at straws....
Jerry's Comstock bet certainly seems tied to LNG export demand and the Haynesville advantage of proximity/lower transport cost to end users. That proposition is now more fraught with uncertainty. Global LNG export capacity, operational and under construction, will maintain a price glut for the foreseeable future. If global economies do not recover quickly, the growth of US LNG will be slowed. LNG is in a race with renewables for adoption of new energy sources and is disadvantaged by a prolonged retardation in demand.