Continuing domestic natural gas production growth will exert downward pressure on prices through next year, resulting in Henry Hub natural gas prices averaging $2.82/MMBtu for 2019 and $2.77/MMBtu in 2020, according to the Energy Information Administration (EIA).
The latest 2019 price forecast, included in a Short-Term Energy Outlook (STEO) released by EIA Tuesday, is down 3 cents from the $2.82/MMBtu forecast in the agency's previous STEO, and would mark a 33 cents/MMBtu decline from 2018.
The declining EIA forecast remains more optimistic than some analysts, who expect Henry Hub prices to average around $2.75 this year and $2.60 in 2020, with a long-term range around $2.65-2.70.
"The implied volatility of front-month natural gas futures prices, which is calculated using futures and options data, has remained lower than the seasonal five-year range since February, setting the lowest seasonal levels ever recorded for the natural gas front-month contract," EIA said. "Implied volatility of natural gas futures prices had previously been at record highs during the winter months of November and December 2018 because of concerns about low storage levels. Natural gas implied volatility averaged 21.3% in March, lower than the five-year average of 37.7%.
"Low implied volatility indicates lower expectations by market participants that prices will change significantly in the near future. Record natural gas production levels and growth may be reducing concerns about supply availability, reducing the need for increased storage.
“However, low inventory levels, combined with increasing natural gas use for electric power generation -- particularly during periods of higher-than-normal temperatures in the summer -- and growth in both liquefied natural gas and pipeline exports could result in higher price volatility during the summer months."
The front-month natural gas futures contract for delivery at Henry Hub settled at $2.64/MMBtu on April 4, a decrease of 22 cents from March 1, according to the STEO.
"Temperatures were significantly colder than normal at the beginning of March, but remained close to normal for the remainder of the month. For the month, U.S. population-weighted heating degree days averaged 9% higher than normal," EIA said.
Prices at the Waha hub in the Permian Basin of West Texas averaged 73 cents/MMBtu in March, $2.22/MMBtu lower than the average Henry Hub spot price during the same period.
"Multiple force majeures have constrained pipeline capacity and reduced westbound flows out of the Permian, which has put downward pressure on prices," EIA said. "Prices at the Waha hub turned negative during the last week of March, and they fell to a record low of minus $4.63/MMBtu on April 3."
Last week EIA reported a 23 Bcf build -- the first of the injection season -- into storage inventories for the week ending March 29. The build compared with a year-ago 34 Bcf withdrawal and a five-year average draw of 23 Bcf. EIA estimated that inventories ended March at 1.2 Tcf, which would be 17% lower than levels from a year earlier and 30% lower than the five-year (2014-2018) average.
EIA expects injections to outpace the previous five-year average during the April-through-October injection season and that inventories will reach 3.7 Tcf at the end of October, which would be 13% higher than October 2018 levels, but 1% lower than the five-year average.