Natural gas prices are forecast to be pressured into 2021, with potential relief as associated output falls on reduced oil drilling and more coal-to-gas switching, according to analysts.

However, with the first quarter near an end, the worldwide economic damage from the Covid-19 pandemic and the oil price war is likely to persist into the second quarter, “if not longer,” according to Moody’s Investors Service. 

Goldman Sachs analysts led by Samantha Dart expect U.S. natural gas to come out of the current market crisis in fairly good shape -- but not for a while. The combination of lower domestic gas production because of sharp exploration and production (E&P) pullbacks, in part on reductions in oil production and hence, associated gas, could last through “at least mid-2021.” 

In addition, the possibility of a global recession this summer “has set the stage for a ‘whiplash’ in U.S. natural gas markets,” the Goldman analysts said. “Specifically, we expect that the cut in associated gas production, although very significant, will show in U.S. gas markets late enough this year.”

The end of summer storage possibly could hit record-high levels near the 4.3 Tcf capacity, further dampening prices.

“However, as we enter the 2020/21 winter, we expect production declines to be visible enough that gas prices will rally sharply in our view to help summer 2021 reach comfortable inventory levels,” said the Goldman team.

The second quarter of 2020 is projected to be the “softest part of summer balances, as this is when we anticipate the economic slowdown impact to gas demand to hit the hardest, while most associated gas production declines are likely to intensify only from late 3Q2020,” according to the analysts.

In one bright spot for traders, Goldman’s view for larger-than-initially-expected production declines, including a 1.5 Bcf/d downward revision to its summer 2020 production numbers, indicates that U.S. balances may not require Appalachian gas production to shut in and balance the market in the upcoming injection season.

As a result, Goldman has increased its 2Q2020 New York Mercantile Exchange gas price forecast marginally to $1.60/MMBtu from $1.50/MMBtu, reflecting the view of a “strong need” for coal-to-gas substitution to balance the market.

Higher TTF, JKM

With the U.S. gas price revision, Goldman also raised its 2Q2020 prices for overseas gas, with Dutch Title Transfer Facility, aka TTF, prices 25 cents higher at $2.50, and Japan Korea Marker (JKM) gas prices 30 cents higher to an average price of $2.40.

The higher overseas prices imply a “shut U.S. LNG export arbitrage” at $1.60/MMBtu U.S. gas prices, according to Goldman. 

The bump in 2Q2020 gas prices doesn’t imply that domestic gas production shut-ins won’t happen this summer, the analysts said.

“With 2Q2020 expected demand declines stronger than supply cuts...storage injections will likely soar, with May flows in particular expected to hit record-high levels, as heating degree days drop sharply. This can potentially create bottlenecks as large volumes of unwanted gas look for a home, which might weigh on cash gas prices and ultimately lead to localized gas production shut-in events away from Henry Hub.”

Bottlenecks could be significant on the Gulf Coast and in the Midwest, where industrial demand for gas is the highest, according to Goldman.

If gas and oil were to be shut in during 2Q2020, analysts said there would be upside risk to a $1.75/MMBtu price forecast for 3Q2020. For now, that price remains intact.

25-Cent Boost

Moody’s senior credit analyst Elena Nadtotchi and her team also reviewed gas prices into 2021 in a new report.

The medium-term price band for Henry Hub natural gas was increased by 25 cents to $2.00-3.00/MMBtu. For oil prices, medium-term assumptions in 2021 now are assumed to average $50-70/bbl West Texas Intermediate (WTI), with a $5 differential between WTI and Brent.

“Our medium-term price bands reflect our fundamental assessments of the prices necessary for producers to reinvest in and replace their hydrocarbon assets, which deplete as they are produced,” the Moody’s analysts said. “But we do expect that realized oil prices will average below our fundamental price range in 2020, and possibly 2021.”

Depressed oil prices are likely to continue through 2020, “before the market begins to rebalance as supplies finally decline.”

Spot gas and oil prices “may decline below the cash cost of production for many producers, even causing some shut-ins because of a likely shortage of storage capacity for holding excess oil.” 

E&Ps continue to announce deep reductions to capital spending, “but the pace of production cuts will not catch up with the rapid contraction in oil demand in the second quarter of 2020.”

The timing of any recovery in demand and pricing remains uncertain, tied mostly to the U.S. and European responses to the virus in 2Q2020, as well as the pace of recovery in China and across Southeast Asia, analysts said.