US EIA pares back H1-20 gas price estimates; sees production declines ahead

The US Energy Information Administration on Tuesday pared back its Henry Hub natural gas spot price estimates for the first two quarters of 2020, citing a warmer-than-expected January and burgeoning inventories.

But EIA forecast that prices will rise in the second quarter and beyond, as production declines coincide with increased demand for gas used in power generation.

The agency, in its February Short-Term Energy Outlook, trimmed its Q1 Henry Hub forecast by 29 cents to $1.98/MMBtu, and its Q2 forecast by 21 cents, compared with the previous month's estimate, to $2.09/MMBtu.

"Warmer-than-normal January temperatures reduced space heating demand and left natural gas working inventories 9% higher than the five-year average at the end of the month," the outlook said, expecting spot prices to be lower than previously forecast in the coming months.

The spot price was seen remaining below $2.00/MMBtu in February and March before picking up again.

Sagging prices were also seen weighing on production over the course of 2020.

"Because of low natural gas prices, EIA expects natural gas production to decline somewhat on a monthly basis through 2020, with dry gas production falling from 95 Bcf/d in January to between 92 Bcf/d and 93 Bcf/d in December," said EIA Administrator Linda Capuano, in a statement accompanying the outlook's release. The lower gas prices were also seen pulling down hydrocarbon gas liquids production.

APPALACHIAN, PERMIAN DECLINES

The gas production declines were mostly expected in the Appalachian region, where low gas prices are seen discouraging gas-directed drilling, and in the Permian, where low oil prices are seen reducing associated gas output. The agency expected dry gas production would stabilize in December at an annual average of 92.6 Bcf/d, 2% lower than in 2020, and marking the first yearly decline since 2016, the outlook said.

The February outlook paired back EIA's total natural gas market production estimates by 0.45 Bcf/d to 101.53 Bcf/d for Q2, while Q1 estimates were roughly flat at 102.31 Bcf/d. For the full year 2020, EIA lowered its production estimate by 0.70 Bcf/d to 101.36 Bcf/d. Estimates for 2021 also dropped 1.73 Bcf/d to 99.87 Bcf/d, compared with the prior month's estimate.

The agency projected Henry Hub natural gas prices would average $2.21/MMBtu for full-year 2020 and $2.53/MMBtu in 2021, down from the previous month's estimates of $2.33/MMBtu and $2.54/MMBtu, respectively.

Helping to keep prices low, EIA expects that over the April-through-October injection season, inventories will rise to almost 4.1 Tcf by October 31, the highest end-of-October inventory level on record, according to Capuano.

On the demand side, EIA lowered by 1.94 Bcf/d to 103.11 Bcf/d its Q1 natural gas consumption estimate, while raising its Q2 demand forecast by 1.82 Bcf/d to 76.52 Bcf/d.

Annual demand estimates also were trimmed, with 2020 consumption estimates lowered 0.49 Bcf/d to 86.24 Bcf/d and 2021 estimates lowered 0.10 Bcf/d to 85.6 Bcf/d.

Turning to electric power, Capuano said EIA expects utility-scale generation from natural gas and nuclear power to remain roughly steady through 2021. The share from coal decreases, from 24% in 2019 to 21% in 2020 and 2021, while the renewables' share will increase from 17% in 2019 to 21% in 2021.

"Assuming the forecast holds, annual US electricity generation from renewable sources will surpass both coal and nuclear for the first time in 2021," Capuano said.