U.S. natural gas prices are forecast to average $3.30/MMBtu in 2021, with even higher prices predicted next summer, according to BofA Securities.

The analyst team led by Francisco Blanch, head of commodities and derivatives research, discussed the outlook for energy overall during a webcast on Tuesday. 

“The bottom line is that higher prices are needed in 2021 to balance the U.S. natural gas market,” Blanch said, which is driving the average price next year about 55 cents above the forward curve.

By comparison, the Energy Information Administration, in its most recent Short-Term Energy Outlook published earlier this month, said monthly average spot prices are forecast to be above the $3 mark through 2021, averaging $3.14 for the year. That’s a $1 improvement over the projected full-year 2020 average of $2.14.

With the storage “congestion risks” now in the past, higher prices are required because forward prices for Calendar Year 2021 “are starting to recognize the undersupplied environment,” the BofA analysts said. 

The front of the curve is about the oversupply and storage congestion threat, but “the back of the curve is searching for an answer to the question of structural undersupply.”
In addition, the impact of Covid-19 cannot be overstated, according to BofA. Oil consumption has fallen, which in turn has sliced into associated gas output. 

The gas market is now in “unfamiliar territory,” said Blanch, “needing to incentivize dry gas production. Higher prices will be needed to quickly grow gas production, while simultaneously shedding the increased power demand from coal-to-gas switching that was required this summer.”

Gas-to-coal switching is the “quickest balancing lever” for the U.S. market as generators are “constantly looking to optimize their dispatch.” 

Higher prices would force reductions in gas-fired generation, at record highs most of this year. Stronger prices could “normalize” gas-to-coal switching, leading to 3-4 Bcf/d less gas-fired power demand. That could become a “primary factor” in balancing the market next year.

Doubling Appalachia, Haynesville Output?

Meanwhile, the gas rig count, which dropped sharply last spring, has not yet recovered, which also means a stronger price signal may be needed. Haynesville Shale and Appalachian Basin gas production may need to double from current levels to help balance the market, according to the BofA analysis. 

Completion activity in the two drilling areas recently was slightly above 100 completions a month. However, to balance the market, “we forecast monthly completions will need to rise into the 200-250 completions/month range. Historically, this suggests a forward curve price average near $3.25/MMBtu.”

The “last resort” to balance the domestic gas market in 2021 is liquefied natural gas (LNG) exports, analysts said.

“Major export routes to both Europe and Asia are in the money by 35-50 cents next summer and should encourage near maximum U.S. exports. In the event that the market requires additional gas to balance next year, the LNG export lever is available.”

Current export margins may require forward prices “at least 50 cents higher” to close the arbitrage and keep gas in the United States, according to BofA. 

The firm’s LNG export forecast assumes near maximum utilization this winter and a 93% utilization next summer, “with some risk that the arb will have to close if production does not respond quickly enough to price signals. Also, as proven this year, hurricane event risk for liquefaction facilities located right on the Gulf of Mexico is sizable.”

On the oil side, the BofA team expects West Texas Intermediate (WTI) prices to average $47/bbl next year, with Brent at around $50.

“Inventories will continue to draw and normalize by end-2021,” analysts said. “And if the distribution of effective Covid-19 vaccines is successful, Brent could hit $60/bbl by mid-2021. Against this backdrop, we expect flat U.S. oil output, with WTI averaging $47/bbl in 2021.