Analysts predict natural gas prices will rebound by end of year

(May 13, 2020)

In early March, natural gas prices in the Permian Basin crashed into negative territory for the first time in seven months. A lack of pipeline capacity and over-production for a glutted market meant that some producers had to pay buyers to take gas off their hands.

Natural gas prices in the U.S. have been persistently low over recent years, regularly trading below $2 per million British thermal units (MMBtu). The major reason for this was the shale oil boom, which led to a corresponding increase in the amount of natural gas produced. The gas produced in the course of extracting shale oil is referred to as associated gas, and it accounts for about 40 percent of overall U.S. natural gas production.

Earlier this year, analysts were projecting that over the course of 2020 gas prices could reach their lowest level since 1999. In March, the benchmark Nymex Henry Hub price fell to $1.50 per MMBtu, the lowest level since 1995.

However, the economic slowdown triggered by the coronavirus pandemic appears set to change the natural gas market heading into 2021. The rapid decline in oil prices, which has led many producers in the Permian Basin and elsewhere to scale back production, will also result in a decline in the production of associated gas.

“The collapse in the crude market is going to create a more constructive gas setting,” explained Matthew Portillo, managing director of exploration and production research at the Houston-based bank Tudor, Pickering, Holt & Co. “Slowing U.S. growth is going to significantly affect associated gas production.”

As a result, gas prices could spike later in the year or in early 2021. “[As] we enter the 2020/21 winter, we expect production declines to be visible enough that gas prices will rally sharply in our view to help summer 2021 reach comfortable inventory levels,” noted a report from Goldman Sachs. The bank estimates that by the winter of 2020-21, prices will reach $3.50 MMBtu, before declining slightly to $3.25 MMBtu by the summer of 2021.

Nonetheless, gas producers’ hopes for higher prices could be dashed if the coronavirus pandemic’s impact on the global economy is long-lasting. Economic lockdowns around the world have reduced demand for U.S. natural gas, leading some to fear that exports could take a hit. If this takes place, any price benefit produced by a drop in overall gas production could be offset by the collapse of the global natural gas market.

Looking ahead to the medium and long-term, observers expect the natural gas price to stay low throughout the decade. Whereas gas was sold for an average of over $6 per MMBtu between 2000 and 2008, which was prior to the shale oil boom, prices for futures contracts until 2030 have failed to rise above $2.80 per MMBtu, according to Forbes.

Even so, some industry representatives are hoping that a limited rebound over the coming year or 18 months from the current extremely low gas prices could help fuel a recovery in the energy sector.

“Analysts and energy executives are increasingly looking to natural gas markets as a first source of relief for U.S. producers,” wrote Dan Eberhart, chief executive of Canary, LLC, a major oil and gas services company.

“Enervus expects prices to exceed $4 per MMBtu and may even reach $4.50 as early as the coming winter. Such an increase would incentivize new drilling and production growth from shale gas plays like the Marcellus, Utica and Haynesville basins. This raises the potential for the recovery in gas to lead to a broader one in the post-coronavirus energy sector,” Eberhart continued.

John Freeman, who leads an analyst research team at Raymond James, estimates that natural gas prices will reach $3.50 per MMBtu by 2021 and could even surpass $4 per MMBtu later that year, which is above the current futures price.

“It’s been more than a decade since we’ve been able to make that statement,” Freeman said. “While the 2020 gas market is well supplied due to the late 2019 production ‘surge,’ we’re expecting 2021 supply to hit a two-year low.”

In Texas, however, natural gas could come under increased pressure due to the rapid expansion of renewables on the electricity grid, which could hold prices low as demand is reduced.

Although the Energy Information Administration forecast in March that natural gas will remain the primary power plant fuel across the U.S. during 2020 and 2021, it warned that demand could fall from a record high of 87.2 billion cubic feet per day (bcfd) in 2020 to 85.6 bcfd in 2021. The main reason it cited for this was the growth in renewable energy production.

Jordan Smith is a freelance journalist and translator covering issues related to energy, the environment, and politics. His work has appeared on the independent news site Opposing Views, and at the Canadian Labour Institute.

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