With people spending more time on their couches than behind the wheel, the near-term outlook for energy demand is low, but Raymond James & Associates Inc. sees natural gas setting up for a turnaround by late next year.
Hold tight, though, through this year and most of next, said the analyst team led by John Freeman. Analysts expect 2020 gas prices to average $1.90/MMBtu, down from a previous forecast of $2.30.
“Specifically, we expect prices to remain below the $2 mark over the next two quarters before recovering as demand normalizes later this year,” the analysts said. The revised 2020 forecast is below both consensus and the current futures strip. In 2021, all that changes, with the forecast reversed higher, to an average $3.50 price from $2.50.
“This increase is primarily driven by a significant slowdown in U.S. associated gas production growth as oilfield activity falls off a cliff due to the significant decline in oil prices,” Freeman and his team said. “Barring a lingering recession due to ‘knock-on’ effects from the pandemic, this will be compounded due to a healthy ‘snap back’ in economic activity in 2021.”
Though it will be some time coming, the Raymond James forecast for 2021 is above consensus and the current strip.
“It's been more than a decade since we've been able to make that statement,” Freeman said. “While the 2020 gas market is well supplied due to the late 2019 production ‘surge,’ we're expecting 2021 supply to hit a two-year low.”
Henry Hub should average $3.50 in 2021 and could reach “the $4 threshold in 4Q2021,” with 10-15 cents of upside potential if the Raymond James analyst team is “too optimistic on oil prices.”
The pandemic has hammered oil markets and is pressuring gas demand, with industrial and commercial activity grinding to a halt and creating headwinds for domestic consumption and liquefied natural gas (LNG) exports, according to Raymond James.
In the past two years, associated gas production, mostly from the Permian Basin, increased by more than 7 Bcf/d and kept markets well supplied.
“These trends took hold even despite a lasting depression in natural gas prices, as oil prices drove the economics of these wells,” said the Raymond James analysts.
U.S. associated gas volumes are expected to increase in 2020. However, given the current oil price and an expected slump in drilling this year, associated gas is forecast to decline by 2.1 Bcf/d in 2021.
“This is the reason why the Henry Hub natural gas futures strip for 2021 has actually increased somewhat over the last month as the rest of the commodity world plummeted to new lows (unless, we are considering toilet paper or hand-sanitizer a commodity),” said the Raymond James analysts.
“As talk of shut-ins begins to proliferate, it’s possible the gas price recovery that we are expecting in the second half of 2020 gets pulled forward materially,” said analysts with Tudor, Pickering, Holt & Co.
“For context, our model shows that the Permian, Eagle Ford, Anadarko, Bakken and Rockies combined represent roughly 40 Bcf/d of wellhead volume at risk with basin level decline rates on a proved, developing producing basis averaging 25-35% for gas,” the TPH analysts said.
“If operators choose to shut these wells in, the supply hit will be much more immediate and would be expected to drive a much faster response on gas prices.”
A fall-off in volumes over the coming weeks could offset the demand headwinds of Covid-19 and excess LNG, “which could top 4 Bcf/d,” the TPH team said. “The picture continues to brighten for natural gas in 2021, but the market still has to navigate somewhat treacherous waters during the shoulder period.”
For oil prices, there is no safety net for now.
BofA Global Research on Monday for the second time in two weeks cut its oil price forecast for West Texas Intermediate (WTI) and Brent. WTI now is expected to average $32/bbl in 2020 and $42 in 2021, with Brent averaging $37 this year and $42 in 2021.
“Both benchmarks may trade in the teens temporarily in April, as a storage containment problem develops,” said the BofA team. In addition, Russia and the Organization of the Petroleum Exporting Countries (OPEC), which launched a price war early in March, “have little to gain by pushing prices below $30/bbl and some agreement is likely by 3Q2020.”
As the negative aggregate demand shock deepened on the Covid-19 expansion, BofA is projecting a global gross domestic product contraction in the first half of 2020.
“On a quarterly basis, we expect to see the steepest decline in global oil consumption ever recorded, with our base case reflecting a 12 million b/d drop in 2Q2020 and a 4.5 million b/d contraction on average for the year.”
The market is reflecting an “inevitable surge in inventories and the likely stock overhang in 2021. It is very ugly, and there is no way to sugarcoat it. We expect a major storage containment problem before the summer kicks in.”
In the near term, BofA analysts expect to see a steeper decline than the forward markets are now reflecting but a faster recovery in 2021 “as production collapses and demand recovers next year. Needless to say, any future inventory and price path is highly uncertain given the unprecedented dislocations.”
Analysts with BMO Capital Markets said the oil markets were “entering a danger zone over the next month due to the calamitous combination of plunging demand and rising supply. If unchecked, this could push global crude oil and petroleum product inventories to capacity.”
Crude could fall under $10/bbl at some point, according to BMO, which would force the Organization of the Petroleum Exporting Countries (OPEC), which is feuding with Russia, to adjust their behavior.
“We expect global oil demand to be down year/year by 7-10 million b/d in the second quarter as economic activity slows further in Europe and the U.S. amid increased quarantining efforts to slow the spread of the coronavirus,” said the BMO analysts. “At the same time, global oil supply could be up roughly 2.5 million b/d on the back of lagged growth in the Permian and rising OPEC output.”
A recovery will come eventually, analysts said.
“Global oil demand averaged roughly 100 million b/d in 2019,” said BMO analysts. “We believe demand will average only 90-92 million b/d over the first half of 2020, down more than 7 million b/d from the same period in 2019. When the coronavirus crisis ends, demand should recover to the 100 million b/d level.”
Concurrently, global oil supply will have contracted as drilling activity declines and production is shut in, which could set the stage for a recovery in oil prices in 2021. However, “high inventory levels are likely to act as a drag on oil prices,” according to the BMO analysts.