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US natural gas prices have surged in recent months, up 139% in
October compared to a year ago, as concerns over adequate winter
supply emerged. The combination of stagnant production, strong
demand fueled by surging liquefied natural gas (LNG) exports, and
diminished demand elasticity from the electric power sector have
all played a role.
A collapse in oil and gas prices in early 2020 led oil and gas
companies to significantly pull back activity to hold capital
spending in line with deteriorating cash flows, and as a result
production fell sharply during 2020. Production recovered modestly
heading into 2021 as shut-in production was brought back online and
companies completed some DUCs. However, continued capital
discipline in 2021, despite strengthening oil and gas prices, has
held natural gas production flat throughout the year.
We do expect drilling activity to increase in 2022 in response
to stronger oil and gas prices; however, the time lag between when
wells are drilled and then begin production should keep the market
tight and Henry Hub prices elevated through next spring.
Global LNG trade for the first ten months of 2021 were up 6%,
driven by economic recovery in Asia and low hydroelectric power
generation in Latin America. Supply outages of LNG export capacity
in the Atlantic Basin contributed to a tighter market. This has
supported US LNG exports, with feed gas demand up 60% through the
first ten months of the year.
Commercial operations are expected to begin at Sabine Pass LNG
Train 6 and Calcasieu Pass LNG this winter, providing further
upside for LNG feed gas demand. Henry Hub natural prices would need
to increase to unheard-of levels to incentivize voluntary US LNG
curtailments. Demand for US LNG will be very robust. Henry Hub gas
prices would need to rise to international price levels of well
over $20/MMBtu even to consider possible curtailment of US
facilities which is highly implausible.
A delicate balancing act between natural gas and coal
power
Over the past decade the US natural gas market has largely
balanced through switching between gas and coal in the power
sector. Gas prices rising during winter 2020/21 led utilities to
increase coal utilization significantly, drawing down coal
stockpiles, leading to a constrained coal market at the end of the
summer 2021. Labor shortages, among other factors, have thwarted
coal producers' ability to increase production even as coal prices
increased. Moreover, significant retirements of coal-fired power
plants this past decade have eliminated 32% of the coal fleet.
Without the benefit of excess coal stockpiles or a significant
uptick in production the thermal coal market is forced to operate
in a more constrained and balanced manner. Further natural gas
price increases are unlikely to yield significant additional
increases in coal generation at the expense of gas generation
providing the demand elasticity the natural gas market had grown
accustomed to this past decade.
This change in the historical pattern of gas-to-coal switching
is adding new demand strength for gas-fired power generation at a
time when demand from other sectors is also rising. The economic
recovery from the global COVID-19 pandemic has spurred industrial
demand. Taken together, they have added to the stout demand for
feed-gas at US liquefaction facilities.
Such tight market conditions have the potential to translate
into volatile winter Henry Hub gas prices. The market is under
pressure this winter because two of three sources of short-term
flexibility are insufficient—ramp up on the supply-side and
switching from gas to coal on the demand-side. Nevertheless, the
third source of flexibility, storage, should allow the market to
make it through winter unscathed unless winter weather is very
severe.
Strong demand to spur strong growth in natural gas production
beyond the winter
We expect production to increase this winter, rising by 3 Bcf/d
winter-over-winter, as strong demand and strengthening natural gas
prices spur robust growth from the Haynesville play.
Along with growth in Haynesville production this winter, we also
expect natural gas inventories to hover near the five-year-average
in our base case which assumes average winter weather, and this has
the potential to put downward pressure on prices and lower than
where NYMEX has been trading.
Still, prices will likely remain elevated through winter overall
as market participants conserve storage inventories until there is
a line of sight to getting through winter. Winter storm Uri in
February 2021 has not been forgotten when a polar vortex reached
deep into Texas curtailing natural gas supply and causing major
disruptions to the electric power grid.
In our winter base case, we expect Henry Hub natural gas prices
to average about $5MMBtu. A milder winter would send prices back
toward $4/MMBtu rather quickly. However, should the winter bring
forth early or prolonged cold, the natural gas market is liable to
be reactive and create additional pricing volatility. In such a
case, a cold winter could see Henry Hub gas prices averaging
between $10-20/MMBtu in some months. In this scenario we would
likely see some industrials curtailing gas use. In our cold winter
case Henry Hub natural gas prices average about $10/MMBtu.
Beyond winter we expect the natural gas market to begin to
rebalance as more production works its way into the system. Despite
the lackluster growth in production in 2021, higher prices are
expected to spur a recovery in drilling activity given the
undersupplied nature of the current natural gas market. We expect
strong growth from the Haynesville in 2022 followed by a return to
an associated gas-driven supply market heading into 2023 and
2024.
Posted 01 November 2021 by Matthew Palmer, Senior Director, Global Gas, S&P Global Commodity Insights and
Sara El-Hakim, Associate Director, Climate and Sustainability Group, S&P Global Commodity Insights
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