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Moody’s Nudges Henry Hub Price Band Higher Through 2019

Moody’s Investors Service on Monday revised its price band higher for Henry Hub natural gas, the industry’s chief measure of prices, and maintained a medium-term price band of $40-60/bbl for oil.

Henry Hub now is expected to average $2.50-3.50/MMBtu over the medium term, defined as through 2019, up from a previous forecast of $2.00-3.50, said Moody’s analysts Terry Marshall and Steven Wood. The outlook for natural gas liquids prices also was increased to a price band of $19-27/bbl from $19-25.

Surging U.S. gas supplies produced from unconventional fields, as well as associated gas from tight oil drilling, “will continue to limit U.S. natural gas prices -- even with natural gas demand likely to increase for U.S. production of liquefied natural gas, and from U.S. Gulf Coast petrochemical plants,” Moody’s analysts said.

Even though the Organization of the Petroleum Exporting Countries (OPEC) has extended global production cuts through at least mid-2018 to balance supply, Moody’s maintained its oil forecast.

“Recent higher oil prices have been supported by expected global economic growth and production restraint by major producing countries, as well as greater geopolitical risk,” said Marshall and Wood. “However, risks to prices, as seen in mid-2017, still persist, including reduced consumption at higher prices and increased supply.”

Crude prices now are at the higher end of the $40-60 range, but “we believe prices will stay within that range over the medium term amid increased production, still-significant global supplies, and modest growth in demand.”

Moody’s medium-term expectations, which extend through at least 2019, are considered the “most relevant” for prices, which analysts use to estimate financial performance and determine ratings for corporates and oil-exporting countries.

Brent-West Texas Intermediate (WTI) and other oil differentials are modeled as needed and consider transportation differentials for natural gas.                                                   

“The Brent-WTI differential is currently wider than the historical average due to negative WTI impacts including hurricanes that reduced the WTI price and contributed to still-high US inventories along with an expectation of continued US shale growth,” said the Moody’s analysts. “Prices in the upper half of the oil price-band will encourage increased supply as countries reduce compliance with their production quotas and will support increased U.S. production.”

Tight/shale oil production in particular has lower extraction costs, “and shale’s drilling efficiencies have risen as the U.S. onshore rig count has more than doubled to 900 rigs in November 2017, from the trough level of 380 rigs in May 2016,” the analysts said.

OPEC’s agreement to reduce output and “political challenges” in the Middle East have bolstered oil prices.

“Yet even with these factors offering a boost, we believe prices will remain rangebound -- and possibly volatile -- amid increases in U.S. shale production, reduced, but still significant global supplies, and potential noncompliance with agreed production cuts -- especially if growth in demand is more tepid.”

U.S. onshore operators indicated during 3Q2017 conference calls that they are giving more consideration to capital discipline and returns-focused performance, “but with prices rising and the ability to hedge and lock in favorable returns, we believe that U.S. shale production will continue to grow as prices rise, increasing global production and keeping a lid on prices.”
Meanwhile, NGL prices have stabilized in line with higher oil prices and a modest upturn in demand, “which over the remainder of the decade should begin to better absorb continuing high levels of NGL production,” analysts said.

“Ethane recovery should begin increasing in 2017 as a several-year demand increase begins, further reducing high ethane rejection and helping both volumes and prices.”
Moody’s stress-case scenario price estimate for crude has been increased to $35/bbl from $30, reflecting improved market fundamentals, while Henry Hub’s gas stress price is unchanged at $2.00/MMBtu.

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