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Record production of US natural gas will drive the 2020 Henry
Hub average price to a level not seen since the 1970s (in real
dollars), according to the latest gas market forecast from IHS
Markit.
Associated gas from the Permian and strong production from
Appalachia will push the average price down below $2.00/MMBtu for
the year, IHS Markit said. (IHS Markit owns PointLogic Energy.)
That is the lowest prices have averaged in real terms since the
1970s. In nominal terms, the last time that prices fell below $2
was 1995.
"Prices are expected to fall despite robust domestic
demand—which has increased by 14 Bcf/d in annual average demand
since 2017—as well as rising levels of exports," IHS Markit
said. "The US is expected to export an additional 3 Bcf/d of LNG in
2020."
But surging demand will not be enough to absorb production that
has grown by more than 14 Bcf/d since January 2018, the company
said. IHS Markit expects production to average more than 90 Bcf/d
this year and in 2020, based on its drilling analysis and
information from leading producers.
"It is simply too much [supply] too fast," said Sam Andrus, IHS
Markit Research and Analysis Executive Director for Global Gas.
"Drillers are now able to increase supply faster than domestic or
global markets can consume it. Before market forces can correct the
imbalance, here comes a fresh surge of supply from somewhere
else."
That next surge of production is expected to come from the
Permian basin in West Texas, Andrus said. "Nearly all the growth in
U.S. natural gas demand over the next few years will come from LNG
exported to other countries. The added supply from the Permian will
match—if not exceed—those volumes," Andrus added.
This fall, the gas pipeline infrastructure in the Permian began
to catch up to production, thus enabling the new surge. The Gulf
Coast Express Pipeline, scheduled to come online in October, will
allow for an additional 2 Bcf/d production capacity. Overall,
Permian gas takeaway capacity is expected to increase 6 Bcf/d
through 2022.
"In all events, the gas is going to get produced out of the oil
well. The real change here is the transportation capacity," said
Michael Stoppard, chief strategist for global gas, IHS Markit. "You
go from a situation where producers, in many cases, were paying
someone to take their gas to having an economic means of getting it
to market."
Price signals
Signs of the sustained low prices are evident today.
Henry Hub gas prices fell by more than a $0.60/MMBtu between
March and August as inventories climbed towards their five-year
rolling average—again, despite record use of natural gas to
generate electricity and growing LNG exports.
Going forward IHS Markit predicts that the US Lower 48 storage
inventory will come out of the winter at 2.1 Tcf, which would be
263 Bcf higher than the rolling five-year average.
Inventories could reach 4.0 Tcf in the fall of 2020. That level
was reached only for a three-week period in November 2016.
Eventually, the market will begin to correct itself, said IHS
Markit. "The downward pressure on prices from rapid growth of
associated gas will curtail drilling activity and bring the market
back into balance. IHS Markit expects prices to rebound and average
$2.25 per MMBtu for 2021, though that figure is still a downgrade
from previous estimates," it said.
"Markets work in the end," said Shankari Srinivasan, vice
president, energy, IHS Markit. "Rising prices stimulate supply and
falling prices curtail it. What is unique here is the extent of
reduction required. But signs still point to this coming price fall
having a limited shelf life rather than being the new normal."
