Facing an oversupply that has been compounded by associated gas growth in the Permian Basin, natural gas prices could be headed for a “down year” in 2019 as demand is unable to keep up, according to analysts with Raymond James & Associates Inc.

The exceptional demand growth that propelled 2018 natural gas prices to their strongest level in nearly a half decade is unlikely to continue in 2019, the team of analysts led by Pavel Molchanov and J. Marshall Adkins said in a recent note. This could result in prices averaging $2.80/Mcf in 2019 before hitting a “cyclical trough” of $2.30/Mcf in 2020, they said.

But it’s not the demand side of the market that’s driving the bearish price outlook from the Raymond James team. They highlighted the growth in the Permian, where associated gas supply has helped to absolutely obliterate the value of natural gas in the West Texas spot market over the past week or so.

With producer fortunes in the Permian largely hinging on liquids pricing, and with limited pipeline takeaway, “sellers” in West Texas have been paying to get rid of their gas, and the regional spot market seems to still be searching for a bottom. According to NGI’s MidDay Alert, Waha traded as low as negative $6.500/MMBtu Tuesday, shattering the previous record low set just last week, when prices dropped below negative $2.000.

Between associated gas and production from dry gas basins, the supply could prove too much even for a market experiencing healthy demand growth, according to Raymond James.

“After an exceptional growth year in 2018, U.S. power demand is set to decline in 2019 and then slowly edge up longer-term. More importantly for gas, it will continue to gain share in the electricity mix, albeit not at the unusually strong pace of 2018,” the analysts said. “In addition, gas demand is being bolstered by petrochemical projects, pipeline exports to Mexico and the ramp-up” of liquefied natural gas exports.

“Putting all this together, the overall picture for U.S. gas demand is very healthy.” But ignoring production growth would be a “textbook example of an unwise ”one hand clapping’ approach. The healthy demand picture is being overwhelmed by the continuing surge in gas supply.”

The Permian-led growth in associated gas output has compounded the growth coming from dry gas plays like the Marcellus and Utica shales, according to Raymond James, setting up an inverse relationship between crude oil and gas prices.

“As such, our above-consensus oil price forecast translates into a fundamentally weak outlook for gas prices,” the analysts said. “In addition, we expect a slower pace of coal retirements. Therefore, we expect a significantly looser market this year,” to the tune of 1.6 Bcf/d oversupplied on average. “This equates to nearly an additional 600 Bcf in storage at the end of the injection season.”

The Raymond James analysts aren’t expecting a repeat of last year’s gains in the power sector, where exceptional gas demand growth helped prices average $3.07/Mcf for 2018 overall, the strongest since 2014. The analysts chalked up the 2018 price strength to a combination of extreme weather, coal retirements and lower than normal renewable utilization.

“U.S. power demand posted the largest increase in nearly a decade, and natural gas captured the vast majority of the incremental share,” the analysts said. “Going forward, we do not expect a repeat of the 2018 natural gas demand surge anytime soon.

“Put simply, the extreme nature of 2018 weather means the picture for 2019 is less bullish for power demand — and, therefore, gas demand. In that context, we anticipate a down year ($2.80/Mcf) for prices in 2019, en route to a cyclical trough ($2.30/Mcf) in 2020.”

Meanwhile, Morningstar Commodities Research analyst Dan Grunwald recently offered a different take on 2019 power burn potential, noting natural gas-fired capacity additions following 2018’s demand growth.

“With over 7,000 MW of generation capacity added in 2018 and another 6,500 MW of summer capacity being added this year before summer, we are set for another record-breaking demand season,” Grunwald said. “The added gas capacity and loss of coal in the supply stack should see 2019 demand surpass 2018. If the total added plant capacity ran at 100% this summer, it would add just over 1 Bcf/d. Realistically that will add 0.5-0.75 Bcf/d outside of a very temperate summer.”