Price Horizon: $3 Gas in 2021 Still Not a Lock

Copyright © 2021 Energy Intelligence Group

Henry Hub cash prices slid under $2 per million Btu over the Labor Day weekend, but it was more of a glitch than a sign of what's to come. Analysts surveyed by Energy Intelligence for its quarterly Price Horizon see a price rally gaining traction in the fourth quarter and into 2021 -- the only debate being how far those gains will extend. “We believe the next few months will see both fits and starts, with further pushes to the upside,” said Energy Intelligence's Research & Advisory Director Abhi Rajendran, one of the more bullish analysts in the survey. The consensus outlook sees a 62¢ jump in Henry Hub cash prices from the third to the fourth quarter, with the benchmark price from November through December averaging $2.57/MMBtu as demand stabilizes. The analysts hailing from investment banks, consultancies, as well as the US Energy Information Administration (EIA), arrived at a $2.95/MMBtu average price forecast for 2021, up about 30¢/MMBtu from the most recent survey (NGW Apr.6'20). And more than rising winter heating loads, the mainstay of annual gas demand, is behind the jump. This year LNG demand will take on more importance as a “balancing mechanism” even though “global oversupply/storage issues are not quite worked out,” Rajendran said. With US gas liquefaction capacity having risen to 66.2 million tons per year (9 billion cubic feet per day) in recent months, LNG is no longer a future demand driver, but a significant market mover today. That was pointedly brought home as overseas buyers canceled dozens of cargoes from US LNG operations as the coronavirus pandemic slashed demand in global markets that were already oversupplied (NGW Apr.27'20). LNG feedstock demand shot as high as 9 Bcf/d in March, but was nearly a third of that in late July and has since clawed back above 4 Bcf/d. So it’s little wonder that indications that cargo cancellations were waning for the winter sent Henry Hub prices from the $1.70s/MMBtu in early August to the $2.50s right before the Labor Day run-up, according to Energy Intelligence price data. While many analysts don’t see demand recovering fully even in 2021, a rising Henry Hub price won’t be responsible for capping exports because global gas prices have skyrocketed, said energy economist Hans van Cleef with Netherlands Bank ABN AMRO. In particular, prices at the Netherlands Title Transfer Facility (TTF) rose sharply in August as a heat wave put the storage refill in Europe under the same kind of pressure as in the US, van Cleef said. According to LNG market indicators compiled by Energy Intelligence, the TTF price has risen more than $1.50/MMBtu since early June when it was so low US LNG exporters couldn’t land spot cargoes at a competitive price (NGW Jun.8'20). “Although gas prices are still relatively low compared to the past few years, this price movement is a first signal that summer is really coming to an end and seasonal demand will start to rise soon,” Van Cleef said. Thus, he concludes, US prices could continue to rise as seasonal demand picks up in the Northern Hemisphere, but “as soon as [gas inventories] are at the right level, and no strange situations arise around demand in relation to Covid-19 and supply -- with extreme weather conditions hampering production -- the price could fall again from mid-October.” Van Cleef was one of the more bearish of the analysts surveyed, forecasting $1.90/MMBtu for the fourth quarter and $2.40/MMBtu for full-year 2021. How Fast Will Supply Rebound? Even more bearish, Dan Lippe of Petral Consulting predicted that market headwinds will keep the 2021 average to $2.25/MMBtu. “In spite of a hot summer with high power generation demand for gas, working gas inventory remains on track to reach 4 trillion cubic feet by late October or early November," he told Energy Intelligence. Lippe takes a contrarian view on most of the key arguments for a $3-plus average next year, the chief among them that the collapse in drilling activity in the major oil plays will keep associated gas supply from recovering. So even if gas-focused E&Ps rein in production growth -- and that is a big if -- rising associated volumes could substantially loosen the supply/demand balance, he maintains. For instance, he notes that Waha Hub prices have remained well under the Henry Hub -- Energy Intelligence data show Waha August prices averaged $1.05 under the Henry Hub after trailing 39¢ in July -- “indicating associated gas production in the Permian Basin was on the rebound with crude oil production.” EIA data likewise show a much faster-than-expected rebound in associated gas volumes, mainly tied to restored oil shut-ins (NGW Aug.24'20). Lippe had one bullish caveat to his analysis: Until EIA gas drilling and production statistics confirm this trend, “bearish traders will be very risk-averse and prices will tend to increase in the first half of winter,” he said. However, “liquidation of surplus inventory in working gas storage will outweigh bullish sentiment and bearish risk aversion after mid-January.” Goldman Sachs, however, is confident in its $3.25/MMBtu forecast for 2021, although the autumn could be challenging. “The overall storage picture looks manageable, but risks to US gas prices through October remain skewed to the downside for cash (less so for Nymex), especially in the Northeast, though also at Henry Hub owing to exceptionally high storage levels,” Goldman Sachs’ Samantha Dart told Energy Intelligence. But from November through calendar-year 2021, "we see risks to our price forecast skewed to the upside, driven by the continued disappointment in production and the suggestion from many US producers that growth discipline will extend well into next year," she said. And Welles Fitzpatrick with investment bank Truist Securities is as adamant that a $3/MMBtu-$4/MMBtu average in 2021 is all but inevitable because of a coming jump in LNG demand, and as debt-burdened gas producers shift from a growth mentality. "E&Ps indicate no price would incentivize new rigs in 2021. Cutting costs is both the total focus right now and hard to do in a growth phase," he said. "We continue to believe that [2021] will be a $3-$4 price environment, with the ceiling being LNG pricing." Tom Haywood, Houston

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