Recovering liquefied natural gas (LNG) demand, forecasts for a colder winter that were supported by an early Midwest chill, low production and abating storage containment worries should support gas prices in the final months of this year and establish momentum for 2021, analysts argue.
“While U.S. storage is projected to exceed 4 Tcf by the end” of injection season, “declining gas production and rebounding demand could leave the market short in 2021,” said Connor McLean, an energy analyst at BTU Analytics. “Depending on how heating demand and LNG exports materialize,” supplies “could be severely diminished by the end of the winter, leading to an upside for Henry Hub pricing.”
The November Nymex futures contract surged past the $3 level on Tuesday, boosted by expectations for higher export levels and bullish weather models. And while price volatility is all but inevitable, outlooks increasingly are calling for futures to hold above the $3 threshold, on average, moving through the winter and 2021 overall.
In its latest Short-Term Energy Outlook published this month, the U.S. Energy Information Administration said it expects prices above $3.00/MMBtu for much of 2021, averaging $3.13 for the year. That would mark a more than 50% jump from a forecasted average of $2.07 for 2020 – a year hampered by demand destruction caused by the coronavirus pandemic and, prior to the arrival of virus outbreaks in March, a mild winter.
Last winter averaged 572 heating degree days (HDDs), well below the 10-year average of 603 HDDs, EIA said. The warmer-than-normal conditions limited residential natural gas consumption, which averaged 20.0 Bcf/d last winter, the lowest since the 2016–17 season.
However, based on weather forecasts from the National Oceanic and Atmospheric Administration that call for prolonged cold snaps across much of the northern United States, in part because of La Niña weather pattern that has taken hold, EIA expects the 2020-21 winter to have 602 HDDs, essentially on par with the 10-year average and about 5% higher than last winter.
Shifts in consumer behavior due to the pandemic – primarily work and school at home — will also contribute to higher residential consumption of natural gas this winter, the agency said. Nearly half of all U.S. homes are primarily heated with natural gas. Despite lower prices in 2020, EIA forecasts average household expenditures for homes heated by gas will rise to $572 this winter, a 6% year/year increase.
After a steep slump earlier this year, analysts are looking for winter to bolster a full LNG recovery – which would further soak up supplies.
Eric Fell, senior natural gas analyst at Genscape Inc., said during a webinar addressing his winter outlook he projects “a return to normal,” with LNG utilization levels up 1.9 Bcf/d this winter over last.
He currently expects storage to close injection season just shy of 4 Tcf, but with rising demand and production of associated gas low because of the pullback in oilfields, he anticipates the combination of solid domestic and LNG demand to help the industry burn through stockpiles over the winter.
In its latest storage report, EIA said inventories for the week of Oct. 16 rose by 49 Bcf to 3,926 Bcf, which was 345 Bcf higher than a year earlier and 327 Bcf above the five-year average. But it also noted that surpluses are getting trimmed quickly alongside lower builds over the past few weeks – with early cold weather across the northern Midwest.
“The supply/demand balance is getting increasingly bullish with smaller-than-normal builds lining up numerous weeks deep,” said NatGasWeather. “In fact, the EIA report two weeks out is now close to printing a draw by our data. This will help to drop current surpluses of 327 Bcf towards 250 Bcf.”
BTU Analytics’ McLean said that while LNG is important, weather’s impact on domestic demand is what’s ultimately crucial for gas.
“Even under a best-case scenario, LNG would be unlikely to add more than 2 Bcf/d of demand above the levels reached last winter,” he said. “On the other hand, cold winter like the U.S. saw in winter of 2013” – the coldest of the past decade – “could add over 6 Bcf/d.”
That combined with strong LNG exports, he added, “could lend strength not just to cash markets but also to the forward market, providing hedging and growth opportunities for producers.”
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