US and Mex prices

U.S. natural gas prices are expected to stabilize in a range of $2.00-$3.00/MMBtu by year-end and into 2021, while Brent crude oil is projected to close 2020 at $49/bbl, according to new forecasts from Moody’s Investors Service.

Mexico natural gas prices and the crude oil export price of state oil company Petróleos Mexicanos (Pemex) are closely tied to Henry Hub and Brent, respectively.

The credit ratings analyst said shut-in oil wells and scaled back associated natural gas volumes in the United States amid fallout from the coronavirus pandemic would keep prices higher than they are currently. The October Nymex contract settled at $2.048/MMBtu on Friday.

The demand side of the equation is dependent as usual on weather, but prices would get a boost if liquefied natural gas (LNG) export demand jumps during the coming winter months to fuel heating needs in Asia and Europe, Moody’s analysts said.  

“Two fundamental and competing factors will shape the trajectory of natural gas prices beyond seasonal volatility: producers’ ability to constrain the growth of U.S. natural gas supplies, and the pace at which a recovery in U.S. LNG exports can prop up” demand, the analysts said in a report issued Thursday.

“Both factors will be sensitive to the pace of recovery in oil prices in 2021,” they said. “Renewed growth in the production of associated gas will stall any rise in gas prices.”

Due to Mexico’s growing reliance on pipeline gas imports from the United States, transactions in Mexico are typically tied to a U.S. index plus the cost of transport.

“Until Mexico develops natural gas indexes of its own, gas will continue to be priced off U.S. indexes, and the two most important U.S. indexes with respect to Mexico are Waha and the Houston Ship Channel,” said NGI’s Patrick Rau, director of strategy and research, in a recent interview.

U.S. indexes “don’t necessarily reflect the supply/demand fundamentals of various locations in Mexico, especially the farther away you move from the U.S./Mexico border,” he explained, adding, “Mexican indexes based mostly on Mexican fundamentals would provide a much better domestic market signal, in my view.”

After plummeting in early 2020, oil prices rebounded over the summer when the U.S. economy gathered momentum as coronavirus-related government restrictions were lifted and gasoline demand started to normalize. West Texas Intermediate (WTI) benchmark crude climbed above $40/bbl in the summer months. Should oil price momentum accelerate, producers could ramp up and, in doing so, create headwinds for Henry Hub.

Permian Basin oil producers in West Texas and southeastern New Mexico “are well positioned to bring back shut-in production of oil quickly — and by extension to boost their production of associated gas, which would cap the price momentum for gas in 2021,” the Moody’s analysts said.

At the same time, U.S. LNG producers face a “highly competitive international market” through 2021. “The recovery in demand for U.S. LNG depends on the rebalancing of an oversupplied global LNG market, and on the pace of recovery in international demand for natural gas,” Moody’s analysts noted.

“Higher oil prices, with WTI at $50/bbl, would reinflate oil-linked international LNG prices, restore the U.S. LNG trade’s profitability, and lift demand for U.S. LNG cargoes,” the analysts said. “By contrast, rising prices for the North American Henry Hub gas benchmark at a time of lower oil prices would weaken the competitiveness of U.S. LNG, and delay the recovery of demand for U.S. cargoes.”

After dropping this year for the first time since 2010, the U.S. Energy Information Administration has forecast that natural gas production will continue to decline in 2021, which would help align supply and demand and support prices next year, the Moody’s analysts said. 

Pemex’s crude oil export basket price, which is updated daily at 6 p.m. CT, stood at $38.97/bbl as of Monday afternoon.

Uneven Recovery

The rebound in oil prices since the lows of April is expected to slow and future gains will depend on a variety of factors including the strength of oil demand and a global economic recovery as the world still wrestles with the Covid-19 pandemic, according to Moody’s Investors Service.

Moody’s expects constrained oil supply to continue underpinning the commodity, with near-term oil prices forecast to average $40-45/bbl, before slowly reaching the firm’s medium-term price assumptions of $45-65/bbl. 

The initial rebound in oil prices has flattened since July, reflecting what Moody’s analysts said is a “slowdown in the recovery of demand, as well as oil production returning after shut-ins in March and April.” A dramatic rebound in oil prices from April, when Brent crude slipped below $20/bbl and West Texas Intermediate (WTI) plunged into negative territory, “reflected improving market fundamentals, both on the demand and supply side,” Moody’s said. 

Global oil demand continues to recover and stood at about 92% of its pre-pandemic level, having shrunk by about 10 million b/d by August, and by more than 23 million b/d in April, according to Moody’s.

Going forward, the firm expects the demand rebound and price recovery to be not only gradual, but rocky as well. Prices are likely to be highly volatile, “with periods outside the top or bottom ends of our medium term price range,” the credit ratings agency said.

Fears have emerged in recent weeks over the sustainability of the oil market rebalancing. A resurgence of Covid-19 cases in many countries, lockdown measures, continued teleworking and a weakened transportation sector have clouded the outlook despite stimulus efforts that have lifted the global economy.

Goldman Sachs Commodities Research noted that those factors helped erase all the gains oil made over the summer during the first week of September. However, as stocks draw down and a supply deficit emerges as the year comes to an end, analysts are forecasting a year-end Brent crude price of $49/bbl. 

Moody’s added that prices will continue getting support from the cooperation of producing nations, which cut production to protect prices earlier in 2020 as the pandemic took hold. In North America, the firm also expects oil production levels to continue recovering this year, but stressed that those volumes should flatten in 2021 even if prices accelerate, mainly because companies must now repair their balance sheets after the downturn.

Crude prices got a lift Thursday after the Organization of the Petroleum Exporting Countries and its allies, aka OPEC-plus met virtually to discuss production policy. While no additional output cuts were announced, members signaled that they will stick with current production quotas. 

“The alliance today showed that it recognizes the unfavorable market developments, acknowledging the risk of oil demand being reduced as a result of rising infections,” Rystad Energy’s Bjornar Tonhaugen, head of oil markets, said after the meeting. He added that OPEC-plus “gave the impression that it does not sweep troubles under the carpet.”

The group’s meeting came just days after both OPEC and the International Energy Agency reduced their projections for oil demand. After the meeting, Brent crude gained $1.08 on Thursday to finish at $43.40/bbl, while WTI followed with similarly strong gains, adding nearly $1.00 to finish at $40.97. However, prices were falling early Monday as Libya was poised to resume some crude exports. 

“Geopolitical issues or attempts to manage supply by the OPEC-plus group of oil-producing nations may add to an uneven recovery in demand and drive wider price fluctuations from time to time,” Moody’s said of the volatility it expects as the market finds balance again.

With additional reporting by Jamison Cocklin