The extensive oil production declines amid the coronavirus pandemic’s fallout cut deep enough into associated gas supplies to likely help drive up Henry Hub natural gas prices in 2021, according to Raymond James & Associates.

Henry Hub prompt Oct 14

“The 2020 oil crash is still likely to drive a massive imbalance in U.S. gas supplies in 2021,” Raymond James analysts said in a report Monday. “U.S. gas prices will still average around $2 this year but exit 2021 around $4.”

Oil prices plummeted into negative territory earlier this year amid the economic malaise and demand destruction imposed by the coronavirus pandemic. Steep exploration and production (E&P) spending cuts followed and curbed associated gas supplies. Production levels are expected to remain low relative to pre-pandemic levels through 2021.

In total, the Raymond James analysts expect onshore dry gas volumes to fall 3.9 Bcf/d year/year in 2021 to 87.6 Bcf/d, with the Marcellus shale the only basin anticipated to show growth – 0.5 Bcf/d year/year. At the same time, as the U.S. economy and markets in both Asia and Europe further adapt to the pandemic and gradually recover, demand is expected to steadily increase. Expectations for normal winter temperatures moving into 2021 – after relatively mild conditions the previous winter – are expected to further drive gas demand, the analysts said.

The U.S. Energy Information Administration (EIA) predicted earlier this month that temperatures would hover near normal and U.S. average heating degree days would be 5% higher this winter than a year earlier. The agency said ongoing efforts to slow the spread of the virus — notably, more people working and attending school at home — will contribute to higher levels of home heating use than normal.

“While weather can always be a wildcard, even with a fairly conservative demand rebound, there should be considerable upside to U.S. natural gas prices in 2021,” the Raymond James analysts said.

The analysts raised their full-year 2020 price forecast 10% to $2.10/MMBtu, following recent gas price rallies. For next year, they expect Henry Hub prices to average $3.50/MMBtu and approach $4.00/MMBtu before the year ends.

The Raymond James outlook follows other bullish forecasts for 2021 gas prices.

Morgan Stanley analysts, citing both production declines and a potential rebound in winter demand, said last week that Henry Hub prices could soar to $5.00/MMBtu in 2021. Researchers said that the drop in oil prices stalled growth in associated gas coming from previously robust oil production. That, combined with a roughly 50% reduction in spending by E&P companies from 2019, could result in a 3-4 Bcf/d year/year decline in associated gas output by the end of 2020. With West Texas Intermediate crude currently below the $40/bbl threshold needed to hold U.S. volumes flat in 2021, the analysts said, declines could continue.

EIA, meanwhile, said this month it expects tightening balances to boost Henry Hub spot prices to a monthly average of $3.38 in January. In the latest Short-Term Energy Outlook, monthly average spot prices are forecast to remain higher than $3.00 throughout 2021, averaging $3.13 for the year from a forecast average of $2.07 in 2020.

EIA said total U.S. working gas in storage is expected to exceed 4.0 Tcf by the end of October, setting a record, but continued low crude prices would keep associated gas output from oil-directed rigs in check.

“Because expected natural gas production will be lower this winter than last winter, EIA forecasts inventory draws will outpace the five-year average during the heating season and end March 2021 at 1.7 Tcf, which would be 6% lower than the 2016–20 average,” researchers said.

The Raymond James analysts noted that increased U.S. liquefied natural gas (LNG) exports are expected to play an important role in shaping the supply/demand picture next year.

U.S. LNG feed gas deliveries into export facilities dropped from a peak of 10 Bcf/d in March 2020 – just before the pandemic took hold in the Lower 48 – to a trough of around 3 Bcf/d over the summer, the analysts said. This fall, however, Asian demand has strengthened as economic conditions improved and industrial energy needs increased.

“We’ve seen somewhat of a ‘Goldilocks’ scenario take place in a few regions – enough pandemic easing for industrial activity to perform a bit better, but still strong residential demand as most people stay home. In response, international gas prices have doubled or even tripled off the bottom,” the Raymond James analysts said.

They see 1.5 Bcf/d of year/year U.S. gas demand growth from LNG exports in 2020 – with the growth coming early and late in the year – followed by another 1 Bcf/d advance in 2021.

The analysts added, however, that rising Henry Hub prices should slow both domestic and export demand by next summer.

“With U.S. gas supply falling off a cliff and demand normalizing,” they said, “we would expect the market to send a price signal to keep price-sensitive U.S. natural gas demand in check.”