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Onshore Natural Gas Output on Pace to Match Demand, Pressuring Prices, Says EIA

Domestic natural gas production growth is expected to keep pace with demand and exports this year, and inventories will build faster than the five-year average, keeping a lid on Henry Hub prices, which are expected to average just $2.89/MMBtu in 2019, according to the Energy Information Administration (EIA).

That would be a 26-cent/MMBtu decline from the 2018 average of $3.15/MMBtu, EIA said in its latest Short-Term Energy Outlook (STEO), which was released Tuesday, and a 22-cent decline compared with the $3.11/MMBtu prognostication in the agency's previous STEO.

EIA expects Henry Hub Prices to recover marginally in 2020, averaging $2.92/MMBtu for the year.

New York Mercantile Exchange contract values for April 2019 delivery traded during the five-day period ending Jan. 10 suggest a price range of $2.06-3.53/MMBtu, encompassing the market expectation of Henry Hub prices in April at the 95% confidence level, EIA said.

The front-month natural gas futures contract for delivery at Henry Hub settled at $2.97/MMBtu on Jan. 10, a decrease of $1.37 from Dec. 3.

"Colder-than-normal weather and below-average inventory levels resulted in higher prices and volatility in November and through early December," EIA said. "However, milder temperatures in the second half of December contributed to substantial decreases in prices, returning them to September levels. For the three weeks ending January 3, U.S. heating degree days were 20% less than normal.

"The moderate weather also helped to slow the rate of inventory withdrawals. Natural gas inventory withdrawals were 256 Bcf less than the previous five-year average for the three weeks ending Jan. 4, helping to narrow the deficit from the five-year average to 464 Bcf for the week ending Jan. 4 from 725 Bcf for the week ending Nov. 30."

EIA reported a 91 Bcf  withdrawal Thursday for the week ending Jan. 4, bringing underground storage to 2,614 Bcf, down 204 Bcf from a year ago and a hefty 464 Bcf deficit compared with the five-year average.

“Based on an assumption of relatively normal temperatures in the first quarter of 2019, along with a forecast of growing natural gas production, EIA forecasts that inventories will be 1,405 Bcf at the end of March, which would be 15% lower than the five-year average for that time of year," EIA said. The agency expects injections to exceed the five-year average rate as production outpaces consumption from the end of March through October, bringing inventories to a projected 3,758 Bcf at the end of October, which would be slightly above the previous five-year average for the end of October and 16% more than at the end of October 2018.

EIA expects dry natural gas production to average 90.2 Bcf/d this year, an 8.3% increase from 2018 levels, with a further 2.2% increase to average 92.2 Bcf/d in 2020. The expected growth in gas production "is largely in response to improved drilling efficiency and cost reductions, higher associated gas production from oil-directed rigs, and increased takeaway pipeline capacity from the highly productive Appalachia and Permian production regions," EIA said.

Total U.S. natural gas consumption averaged an estimated 81.6 Bcf/d in 2018, and EIA expects it to increase by 1.1 Bcf/d (1.3%) in 2019 and then increase by a further 0.9 Bcf/d (1.1%) in 2020. Electric generation consumption, which averaged 29.0 Bcf/d in 2018, will remain largely unchanged in 2019 and then rise by 3.3% in 2020, "because of continuing increases in natural gas-fired electric generation capacity," EIA said. Residential and commercial consumption this year are forecast to average 13.4 Bcf/d and 9.3 Bcf/d. Industrial sector consumption is expected to rise by 2.0% in 2019 and by 0.9% in 2020.

U.S. exports of natural gas, including exports to Mexico and Canada via pipeline and as liquefied natural gas (LNG), averaged 10.0 Bcf/d in 2018 and are expected to increase by 31.5% to 13.2 Bcf/d in 2019 and to 15.2 Bcf/d in 2020, EIA said.

LNG exports are expected to increase from an estimated 3.0 Bcf/d in 2018 to 5.1 Bcf/d this year and 6.8 Bcf/d in 2020. U.S. natural gas exports to Mexico via pipeline, which reached 4.6 Bcf/d through the first 10 months of 2018 " should to continue to increase as more natural gas-fired power plants come online in Mexico and more pipeline infrastructure within Mexico is built," EIA said.

Meanwhile, U.S. net natural gas pipeline imports from Canada decreased from 2017 to 2018, a trend that EIA expects will continue as Appalachian production growth displaces some Canadian imports in U.S. Midwest markets.

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