With limited global supplies and robust demand entering the peak winter season, Raymond James analysts this week boosted their already bullish natural gas price forecasts for this year and 2022.

Raymond James Price Outlook

Analysts J.R. Weston and John Freeman said they raised their full-year 2021 Henry Hub average price forecast 6% to $3.70/MMBtu and their expectation for next year to $4.50, up 13%.

“Even after the recent euphoria, there’s still upside,” the analysts said.

U.S. prices have more than doubled this year, with multi-year highs above $6 amid fears of inadequate supplies in Europe as well as parts of Asia and South America ahead of winter. Those concerns have fueled steady demand for U.S. exports of liquefied natural gas (LNG) at a time when domestic supplies are increasing but still potentially light if the coming winter proves particularly harsh.

Analysts at the American Gas Association (AGA), meanwhile, said this week that exports via pipeline to Mexico, and LNG to Europe and Asia, are elevated this year and expected to remain so through the winter.

Average demand for U.S. gas this year to date is up about 6 Bcf/d versus the same period last year, the AGA team said, driven largely by export demand for LNG and pipeline gas to Mexico.

The Center for Strategic and International Studies’ (CSIS) Nikos Tsafos said this week on NGI’s Hub and Flow Podcast that Mexico has increasingly become an extension of the U.S. gas market as new cross-border pipeline capacity has come online.

Pipeline imports have largely displaced LNG cargoes into Mexico, said Tsafos, who is the energy and geopolitics chairman with the Energy Security and Climate Change Program at CSIS.

“Actually we’ve seen Mexico retreat from global gas markets because it’s become much more dependent on the United States,” Tsafos said. 

On the global gas market, Tsafos said that some of the high current strip pricing may be driven more by “panic buying” than by fundamentals, and that an abrupt market correction may be in order over the winter.

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The prompt-month New York Mercantile Exchange Henry Hub contract was trading at $6.225/MMBtu Wednesday afternoon, as U.S. forecasts pointed to cold weather and stronger heating demand on the horizon.

The Raymond James analysts noted that U.S. production has increased this year from anemic 2020 levels — when the pandemic forced cuts — but increases to output have been modest and largely offset by rising LNG exports.

“With this context, we still think price-induced demand headwinds are necessary to get year-end U.S. natural gas inventories at normalized levels of around 4 Tcf in 2022,” Weston and Freeman said. They estimated 2021 inventories are likely to land at about 3.6 Tcf. An average price of $4.50 next year should be high enough to keep more gas in the United States and raise stockpiles to a full capability around 4 Tcf late in 2022.

“A core [tenet] of our outlook is that the U.S. market should try to drive closer to full ending storage levels each year to provide as much cushion as possible for growing U.S. LNG exports and other demand factors — in other words, to keep days of supply from getting too tight,” the analysts said.

The U.S. Energy Information Administration (EIA) said this month that domestic dry natural gas production averaged an estimated 93.3 Bcf/d during the third quarter, up from 91.6 Bcf/d in the first half of the year, according to EIA.

“Production in the forecast rises to an average of 94.0 Bcf/d during the winter, and averages 96.4 Bcf/d during 2022, driven by natural gas and crude oil prices, which we expect to remain at levels that will support enough drilling to sustain production growth,” EIA researchers said.

The Raymond James team expects a similar increase in output next year, forecasting 3 Bcf/d of domestic growth by year-end 2022 relative to the start of this year.

“Taking a basin-by-basin look at dry gas production growth, nearly all resource plays have tallied year/year increases thus far into 2021, recovering from 2020 pandemic lows,” the Raymond James analysts said. “However, moving into 2022, we expect only two basins, the Permian and Haynesville, to meaningfully boost supply” because “both contain relatively large amounts of private operators with heavier growth-oriented priorities.”

Large, publicly traded producers that have historically been active in the other basins have been slow to ramp up output, preferring instead to return capital to shareholders and invest more in renewable sources of energy.

U.S. demand, meanwhile, is expected to prove robust this winter. EIA said as part of its latest Short-Term Energy Outlook that it expects a 3% increase in average U.S. heating degree days this winter compared to last, based on forecasts from the National Oceanic and Atmospheric Administration.

With additional reporting by Andrew Baker