Robust storage injections are likely to limit Henry Hub natural gas spot prices to an average $2.50/MMBtu in the second half of the year and $2.77/MMBtu next year, though swings in temperatures across the nation could put unexpected pressure on prices, according to the Energy Information Administration (EIA).
EIA's forecast for all of 2019, included in a Short-Term Energy Outlook (STEO) released Tuesday, is $2.62/MMBtu, a 15-cent decline compared with the previous STEO. The 2020 estimate is unchanged from the previous STEO, while the second half 2019 forecast is a 29-cent decline.
"The lower forecast reflects recent price declines and EIA’s updated assessment of U.S. drilling activity and average well productivity," the agency said.
"Henry Hub spot prices dropped from an average of $2.64/MMBtu in May to an average of $2.40/MMBtu in June, with some daily prices in June falling below $2.30/MMBtu. The recent price declines reflect relatively mild weather in June that led to lower-than-expected natural gas-fired electricity generation (compared with EIA's June STEO) and allowed natural gas inventory injections to outpace the five-year average rate."
Last week EIA reported an 89 Bcf build into storage inventories for the week ending June 28. EIA estimated that inventories stood at 2,390 Bcf, compared with 2,141 a year ago and a five-year average of 2,542 Bcf.
"Inventories ended March 2019 at 1.2 Tcf, which was 0.2 Tcf lower than March 2018 levels and 0.5 Tcf lower than the five-year (2014–18) average," EIA said. "Although the 2019 injection season started at the lowest storage level since 2014, injections have outpaced the five-year average during the second quarter of 2019."
EIA expects moderate supply growth in late 2019 and into 2020, which should put some upward pressure on prices.
"However, the forecast is temperature dependent...In the near term, warmer-than-forecast temperatures in the third quarter that increase natural gas-fired electricity generation could cause prices to be higher than EIA’s forecast.
“Similarly, although EIA forecasts Henry Hub prices will rise to an average of $3.05/MMBtu in January 2020, severely cold winter temperatures could cause prices to spike much higher, although a mild winter could keep prices at less than $3/MMBtu."
The front-month natural gas futures contract for delivery at Henry Hub settled at $2.57/MMBtu on July 3, a decrease of 11 cents from June 3. Current options and futures prices imply that market participants place the lower and upper bounds for the 95% confidence interval for December 2019 contracts at $1.64/MMBtu and $4.03/MMBtu, respectively.
"Natural gas production has consistently reached new record-high levels in recent months," EIA said, but the agency "expects production growth will begin to decelerate in the coming months. During the first half of 2019, EIA estimated that dry natural gas production averaged 89.9 Bcf/d, a 12.2% increase from the same period in 2018. In the second half of 2019, EIA expects dry natural gas production to average 92.7 Bcf/d, a 7.1% increase from the second half of 2018.
"The slowdown in production growth reflects lower forecast prices. Slowing demand growth from 2018 levels has reduced the need for natural gas production to grow at the pace experienced during the past year, contributing to a lower market-clearing price.
“However, even though growth is expected to slow, EIA expects growth in natural gas production through the remainder of 2019, largely in response to improved drilling efficiency, year-over-year cost reductions, and higher associated gas production from oil-directed rigs," EIA said.
EIA estimated that total U.S. natural gas consumption averaged 82.1 Bcf/d in 2018, with expectations it will increase by 2.5 Bcf/d (3.1%) in 2019 and then remain almost flat in 2020. Consumption by the electric power sector is forecast to increase this year by 1.1 Bcf/d (3.8%) from 2018 levels as a result of favorable gas prices and coal-to-gas switching.
At the same time, residential and commercial natural gas consumption are forecast to average 13.7 Bcf/d and 9.7 Bcf/d, respectively, similar to 2018 levels.