EIA: Gas prices to increase with rising demand, reduced production

Oct. 19, 2020

Rising domestic demand for natural gas and demand for LNG exports heading into winter, combined with reduced production, will cause Henry Hub spot prices to rise to a monthly average of $3.38/MMbtu in January 2021, the US Energy Information Administration said in its October Short-Term Energy Outlook (STEO). Monthly average spot prices are expected to remain higher than $3.00/MMbtu throughout 2021, averaging $3.13/MMbtu for the year, up from a forecast average of $2.07/MMbtu in 2020.

In September, the Henry Hub natural gas spot price averaged $1.92/MMbtu, down from an average of $2.30/MMbtu in August. Lower natural gas spot prices reflected declining demand for natural gas from the US electric power sector as a result of cooler-than-normal temperatures during second-half September and relatively low demand for US LNG exports amid hurricane-related activity in the Gulf of Mexico.

EIA estimates that total US working natural gas in storage ended September at more than 3.8 tcf, 12% more than the 5-year (2015–19) average. In the forecast, EIA expects inventories to be more than 4.0 tcf on Oct. 31, which would be a record high. However, because expected natural gas production will be lower this winter than last winter, EIA forecasts inventory draws will outpace the 5-year average during the heating season and end March 2021 at 1.7 tcf, which would be 6% lower than the 2016–20 average.

Total US consumption of natural gas will average 83.7 bcfd in 2020, down 1.8% from 2019. The decline in total consumption reflects less heating demand in early 2020, contributing to residential and commercial demand in 2020 averaging 13.1 bcfd (down 0.7 bcfd from 2019) and 8.7 bcfd (down 0.9 bcfd from 2019), respectively. EIA forecasts industrial consumption will average 22.3 bcfd in 2020, down 0.8 bcfd from 2019 as a result of reduced manufacturing activity.

EIA forecasts that total US natural gas consumption will average 78.7 bcfd in 2021, a 5.9% decline from 2020. The expected decline in 2021 is the result of rising natural gas prices that will reduce demand for natural gas in the electric power sector.

US dry natural gas production is forecast to average 90.6 bcfd in 2020, down from an average of 93.1 bcfd in 2019. In the forecast, monthly average production falls from a record 97.0 bcfd in December 2019 to 85.9 bcfd in May 2021, before increasing slightly. Natural gas production declines the most in the Permian region, where low crude oil prices reduces associated natural gas output from oil-directed rigs. Dry natural gas production in the US will average 86.8 bcfd in 2021, EIA forecasts. Production will begin rising in second-quarter 2021 in response to higher natural gas and crude oil prices.

EIA estimates that US LNG exports averaged 4.9 bcfd in September, an increase of 1.2 bcfd from August. Higher global forward prices indicate improving netbacks for buyers of US LNG in European and Asian markets for the upcoming fall and winter seasons. The increased prices come amid expectations of natural gas demand recovery and potential LNG supply reductions because of maintenance at the Gorgon LNG plant in Australia. EIA forecasts that US LNG exports will return to pre-COVID levels by November 2020 and will average more than 9.0 bcfd from December 2020 through February 2021.