Natural gas production growth next year will outweigh relatively low storage levels, exerting downward pressure on prices, which are expected to average $2.98/MMBtu in 2019, down 4 cents from the 2018 average, according to the Energy Information Administration (EIA).
The 2019 price forecast is significantly lower than the $3.25 MMBtu that EIA prognosticated for 4Q2018 in its latest Short-Term Energy Outlook (STEO), which was released Tuesday. The 2019 forecast is down just a penny from the $2.99/MMBtu included in the previous STEO.
New York Mercantile Exchange contract values for February 2019 delivery traded during the five-day period ending Nov. 1 suggest a price range of $2.06-4.94/MMBtu, encompassing the market expectation of Henry Hub prices in February at the 95% confidence level, EIA said.
The front-month natural gas futures contract for delivery at Henry Hub settled at $3.24/MMBtu on Nov. 1, an increase of 14 cents from Oct. 1.
The Henry Hub natural gas spot price averaged $2.99/MMBtu in September, 3 cents higher than in August, and on Sept. 24, futures prices rose to more than $3/MMBtu for the first time since June.
"Several factors have contributed to higher Henry Hub prices," EIA said. "Warmer-than-normal temperatures persisted into early October, helping to maintain high power demand for natural gas in some parts of the country, while an early round of colder temperatures in other parts of the country resulted in increased residential and commercial heating demand.
“In addition, nuclear outages further contributed to demand for natural gas in power generation. The higher demand helped to keep storage levels low heading into winter, which put upward pressure on prices."
Last Thursday, EIA reported 3,143 Bcf in storage, a 48 Bcf increase from the prior week but a 623 Bcf decline compared with the same time last year and 638 Bcf below the five-year average.
"Concerns about low storage levels as winter approaches contributed to an increase in volatility in natural gas futures," EIA said. "Natural gas implied volatility averaged 38.7% in October, near the five-year average. In February 2018, implied volatility fell lower than the five-year range, and, during the summer, it reached the lowest levels ever recorded for the natural gas front-month contract.
“Record natural gas production growth and production levels helped to reduce concerns about supply availability and kept prices in a narrow trading range. Record natural gas demand for power generation and increased exports, however, countered some of the production growth and prevented inventories from reducing the storage deficit from last winter.
“Volatility re-emerged as the end of the injection period approached with inventories still lower than historical levels."
Total U.S. dry natural gas production in October reached an estimated 86.9 Bcf/d, 0.7 Bcf/d higher than in September. EIA expects dry natural gas production will average a record high 83.2 Bcf/d in 2018. EIA expects natural gas production will continue to rise next year to an average of 89.6 Bcf/d.