Fitch Ratings Inc. has substantially raised its Henry Hub and European natural gas price assumptions through 2022, citing “strong year-to-date prices, recovering demand and supply challenges.”
“U.S. gas prices have…benefited from heightened weather-driven demand, as well as U.S. dry and associated gas production discipline,” the credit ratings analysts said, adding that liquefied natural gas (LNG) and Mexico export demand remained strong as well.
As a result, U.S. storage inventories are about 174 Bcf below the five-year average.
“We believe these factors will support pricing over the next 12-18 months, but expect a normalization of demand and potentially weaker producer discipline to result in a return to mid-cycle pricing in 2023 and thereafter,” the Fitch team said.
The biggest upward revision was to the European Title Transfer Facility (TTF)/National Balancing Point price assumption, Fitch said. The price was increased to an average $10.00/Mcf for 2021, up from a mid-June assumption of $6. For 2022, the base case TTF assumption has been raised to $6.00 from $5.00.
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Current record-high spot prices in Europe “are driven by extreme weather conditions this year, low gas inventories in storage, strong demand in Asia, recovering demand in Europe and insufficient additional supplies,” the credit ratings analysts said.
“European spot prices have been closely correlated with those in East Asia as supplies of LNG to Europe have reduced since 2020, and both regions are competing for available LNG cargoes.”
European gas storage inventories, meanwhile, are below levels at this time in 2019 and 2020, the Fitch team said. Stocks are low despite “nearly record gas export volumes in January-August 2021” by Russia’s Gazprom PJSC, none of which went to former Soviet Union countries.
“We expect some of these challenges to spill over into 2022, and therefore, have also increased our 2022 price assumptions,” the Fitch analysts said. “Still, the 2022 price assumptions are well below the 2021 levels as we expect weather conditions to normalize and Gazprom to increase its exports slightly.”
Fitch raised its assumptions for Henry Hub to $3.40/Mcf from $2.45 for 2021. Prices for 2022 were increased to $2.75 from $2.45.
Fitch’s base case assumption for the West Texas Intermediate oil price, meanwhile, is $60/bbl for 2021 and $52 for 2022.
For Brent oil, the assumption is $63/bbl for 2021 and $55 for 2022. Natural gas buying at prices linked to competing fuels such as oil fell to 18.6% of the global market in 2020 from 24.4% in 2019, according to the last annual Wholesale Gas Price Survey conducted by the International Gas Union. Meanwhile, contracts tied to North American natural gas prices saw record open interest in late August, according to Intercontinental Exchange Inc.
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