Natural gas prices are poised to rebound in 2021, with Henry Hub spot prices on track to average $3.01/MMBtu for the year, nearly $1 higher than 2020 prices, according to updated projections from the U.S. Energy Information Administration (EIA).

In its first Short-Term Energy Outlook of the new year, published Tuesday, the agency offered up a forecast for improved economic activity and rising energy use in the year ahead after Covid-19 put a damper on both in 2020.

EIA’s macroeconomic assumptions, based on IHS Markit forecasts, include a projected 4.2% increase in U.S. real gross domestic product (GDP) in 2021, followed by a 3.8% increase in 2022. This would reverse the 3.5% decline in GDP observed in 2020. 

The rising GDP would contribute to an increase in total energy use in the United States over the next two years. After falling 7.8% in 2020, total U.S. energy consumption is set to increase 2.6% in 2021 and another 2.5% in 2022, according to EIA forecasts.

The $3.01 forecast for Henry Hub in 2021 would represent a marked improvement over 2020, when prices there averaged only $2.03. Henry Hub is expected to strengthen further in 2022, rising to $3.27, according to EIA.

The strengthening natural gas prices are expected to coincide with rising exports; domestic consumption, which averaged 83.1 Bcf/d in 2020, should ease lower in 2021 (down 2.8%) and 2022 (down 2.1%) as higher prices lead to less gas use in the power sector, forecasts show.

While natural gas fueled a 39% share of U.S. electric power generation in 2020, gas use is expected to drop to 36% in 2021 and 34% in 2022. EIA attributed the decline to both “significantly higher natural gas fuel costs and increased generation from renewable energy resources.”

EIA expects gas exports to rise from 6.5 Bcf/d in 2020 to 9.8 Bcf/d in 2021 before climbing further to 10.7 Bcf/d in 2022. The United States is forecast to export an average of 8.5 Bcf/d in the form of liquefied natural gas (LNG) in 2021. This is set to rise to 9.2 Bcf/d in 2022, the agency said.

“Forecast growth in U.S. LNG exports is supported by several factors, including a gradual post-Covid-19 recovery in global LNG demand in established markets, high winter LNG demand in Asia, and expansions in global LNG import infrastructure in existing markets with several new countries expected to become LNG importers in the next two years,” researchers said.

On the supply side, U.S. dry natural gas production fell 2.5% year/year to an average of 90.8 Bcf/d in 2020, and output is expected to slide further to an average of 88.2 Bcf/d in 2021 before rising to 89.7 Bcf/d in 2022.

Declining production should allow the market to deplete storage inventories to below the five-year norm by the end of the current withdrawal season, according to EIA.

“EIA forecasts that declines in U.S. natural gas production this winter compared with last winter will more than offset the declines in natural gas consumption, which will contribute to inventory withdrawals outpacing the five-year average during the remainder of the winter,” researchers said. “…Forecast natural gas inventories end March 2021 at 1.6 Tcf, 12% lower than the 2016–20 average.”

As measures to contain the pandemic had a chilling effect on energy demand in 2020, one side effect was a decline in carbon dioxide (CO2) emissions from the energy sector. EIA measured an 11.1% drop in energy-related CO2 emissions in 2020. Emissions are expected to increase by 4.7% in 2021 and by 3.2% in 2022.

“Even with growth over the next two years, forecast CO2 emissions in 2022 remain 3.9% lower than 2019 levels,” according to EIA.

In the latest STEO, EIA also forecasts Brent crude spot prices should average $53/bbl in 2021 and 2022, compared with an average of $42 in 2020. Oil prices “rose steadily throughout December and the first week in January,” as Brent and West Texas Intermediate (WTI) settled higher than $50, “their highest levels since February 2020,” researchers noted.

EIA attributed the upward oil price movements to demand and supply-side factors. 

“Expectations of economic recovery associated with the approval and production of a number of Covid-19 vaccines is perhaps the most significant demand-side factor in crude oil price changes,” according to EIA. “Vaccine efforts have contributed to a broad increase in prices across most asset classes and commodities, reflecting market expectations for economic growth.”

On the oil supply side, EIA noted, production cuts by the Organization of the Petroleum Exporting Countries and its allies “are expected to continue, suggesting that crude oil inventory draws are also likely to continue during the coming year.” 

In the Weekly Petroleum Status Report issued on Wednesday, EIA said total U.S. commercial petroleum inventories decreased by 9.4 million bbl in the week ended Jan. 8. Crude oil inventories, excluding those in the Strategic Petroleum Reserve, decreased by 3.2 million bbl from the prior week.