Mexico should expect higher natural gas prices in 2021 as coronavirus vaccines become available and global economies heat up following the pandemic-inspired slump of 2020.
Even the Waha hub in West Texas, which saw wild pricing swings and went negative on numerous occasions in 2020, should see more stability and a reduced differential to Henry Hub for the “foreseeable future,” according to analysts at Tudor, Pickering, Holt & Co. (TPH).
This is largely because of Kinder Morgan Inc.’s 2.1 Bcf/d Permian Highway Pipeline (PHP), which began full commercial in-service on Jan. 1 and is now delivering gas from Waha in West Texas to the Katy area near Houston, along with connections to the Gulf Coast and Mexico markets.
The new pipeline had been flowing volumes during the commissioning process for several weeks prior to full commercial in-service.
“After averaging a minus $2.16/Mcf differential in October, Waha pricing improved significantly over the course of December, averaging just minus 18 cents from the commencement of PHP line pack through the end of the year,” TPH analysts said. “Should pricing hold near current levels, we would expect to see a 75-80 cents/Mcf first-quarter improvement over average fourth-quarter levels.”
Waha is an increasingly important source of gas supply to Mexico’s central-western region. In October, the Waha-to-Guadalajara, or “Wahalajara” system, which transports gas from the Permian Basin to the industrial center of Guadalajara in the Bahío region came online.
The majority of Mexico’s natural gas is imported from the United States, and is priced off liquid U.S. indexes like Waha and Henry Hub.
Stronger liquefied natural gas (LNG) volumes out of the United States driven principally by rising Asian demand should also prop up U.S., and in turn Mexican, prices in 2021.
TPH analysts see U.S. gas inventories “contract marginally” versus five-year average levels in the first quarter “before diverging materially” through the second and third quarters as “much stronger year/year LNG utilization pushes the market into undersupply.”
This has TPH estimating a return to $3.00/MMBtu-plus pricing ahead of the 2021/2022 U.S. winter as the market looks to avoid entering the next heating season with storage “at such precarious levels.”
As an example of soaring Asian natural gas demand, Trafigura Group Pte. Ltd. purchased an LNG cargo from Gunvor Group Ltd. for $20.80/MMBtu for early February delivery to Incheon, South Korea, which set a record for Japan Korea Marker prices.
Analysts at Raymond James and Associates Inc. are even more bullish than TPH and see U.S. gas prices exiting 2021 around $4.00.
“We are convinced that current oil/gas strip pricing would drive a significant domestic supply decline and leave us dramatically short on natural gas in 2021,” the Raymond James analysts said in a recent research note. “In our view, the transition to a relatively normal demand environment in the coming year paired with significant domestic natural gas production declines sets up quite well for Henry Hub natural gas prices throughout 2021 (assuming normal weather).”
In a recent survey conducted by the Federal Reserve Bank of Dallas, U.S. energy executives were more cautious and saw Henry Hub natural gas prices averaging $2.40-2.79/Mcf by the end of 2021, but some saw prices as high as $3.19.
In its latest Short-Term Energy Outlook, the U.S. Energy Information Agency forecast monthly average spot prices of $3.01/MMBtu for 2021, up from a forecast average of $2.07 for 2020.
Reflecting this rising trend, gas prices in Mexico reached a 21-month high in November, averaging $3.45/MMBtu, according to the IPGN monthly natural gas price index published by Comisión Reguladora de Energía (CRE). CRE compiles the index based on day-ahead spot prices reported anonymously by marketers. The November price is the most recent available.
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Raymond James analysts also expect oil prices to climb in 2021, with West Texas Intermediate (WTI) crude closing at $65/bbl in their current projection. That implies “an average of $57 for the year (20% above the futures strip), followed by an average of $65 in 2022 (40% above the strip), with Brent at a modest premium.”
The Raymond James analysts warned, however, that a return to pre-pandemic global oil demand would depend on the widespread vaccination against Covid-19, which so far has been slow going and remains hard to predict.
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