Gas Price Forecast Falls to Levels Not Seen Since 1970s

(October 21, 2019) — A persistent oversupply of natural gas will drive the 2020 average price at the Henry Hub down to a level not seen in decades, according to a new report from IHS Markit. The oversupply, to be reinforced by a new surge in associated gas production from the Permian Basin, will push the average price down below $2/MMBtu for the year, the market intelligence provider maintains. That is the lowest prices have averaged in real terms since the 1970s. In nominal terms, the last time prices dipped under $2 was in 1995.

Prices are expected to fall despite robust domestic demand, which has increased by 14 Bcfd in annual average demand since 2017, as well as rising levels of exports. The U.S. is expected to export an additional 3 Bcfd of LNG in 2020. It still will not be enough to absorb production that has grown by more than 14 Bcfd since January 2018. IHS Markit expects production to average more than 90 Bcfd in 2019 and 2020.

“It is simply too much too fast,” said Sam Andrus, executive director at IHS who covers North American gas markets. “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.”

That next surge in output is expected to come from the Permian Basin in West Texas. Growth in the region will more than compensate for declines elsewhere, sustaining the oversupply and the downward pressure on prices that it creates. “Nearly all the growth in U.S. natural gas demand over the next few years will come from LNG exported to other countries,” Andrus said. “The added supply from the Permian will match, if not exceed, those volumes.”

Two key factors will drive the Permian surge, IHS Markit outlines. Associated gas, the source for much of the region’s production growth, is a byproduct of oil production, meaning it is less sensitive to natural gas price signals. And additional pipeline capacity is expected to alleviate transportation constraints. The Gulf Coast Express pipeline, scheduled to enter service this month, will allow for an additional 2 Bcfd in production capacity. Overall, Permian gas takeaway is expected to increase 6 Bcfd through 2022.

“In all events the gas is going to get produced out of the oil well,” said Michael Stoppard, chief strategist for global gas at IHS Markit. “The real change here is the transportation capacity. 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.”

Signs of the coming price shift can already be seen. Gas prices fell by more than 60 cents per MMBtu between March and August as inventories climbed toward their five-year rolling average—despite record use of natural gas to generate electricity and growing LNG exports. Going forward, IHS Markit predicts that the U.S. lower-48 storage inventory will come out of the winter at 2.1 Tcf, 263 Bcf higher than the rolling five- year average, and head toward 4 Tcf in the fall of 2020.

Eventually, the downward pressure on prices from the rapid growth of associated gas will curtail drilling activity and bring the market back into balance. IHS Markit expects prices to rebound and average $2.25/ MMBtu in 2021, though that figure is still a down- grade from previous estimates. “Markets work in the end,” said Shankari Srinivasan, vice president, energy, at IHS. “Rising prices stimulate supply and falling prices curtail it. What is unique here is the extent of reduc- tion required. But signs still point to this coming price fall having a limited shelf life rather than being the new normal.”

(SOURCE: The Weekly Propane Newsletter, October 21, 2019, available by subscription)