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."

Reprinted from PointLogic News. For more natural gas news from IHS Markit, visit the PointLogic website.

Kevin Adler is an Editorial Director, Natural Gas, at IHS Markit.

Posted 19 September 2019

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.