US EIA lifts natural gas demand, price forecasts for Q1 after cold start to 2022

The US Energy Information Administration bumped up its US natural gas demand and price forecasts for the first quarter of 2022, following a colder-than-normal January in the Northeast and Midwest and anticipating continued strong demand for US LNG exports.

EIA, in its February Short-Term Energy Outlook, raised its natural gas consumption estimates by 3.42 Bcf/d to 102.47 Bcf/d for Q1, and by 650 MMcf/d to 71.56 Bcf/d for Q2. It also pushed up its consumption forecasts by 1.50 Bcf/d to 84.27 Bcf/d for 2022 on average, and by 1.01 Bcf/d to 83.85 Bcf/d in 2023.

Colder-than-normal weather in January increased demand for gas used for space heating and power generation, the agency said, noting the spot price at Henry Hub averaged $4.38/MMBtu for the month, up from $3.76/MMBtu in January.

"EIA forecasts that natural gas prices will rise to $4.70/MMBtu on average in February, then average around $3.80/MMBtu for the last three quarters of the year," the agency said in the press release accompanying the report. Highly variable winter weather forecasts create "a significant amount of uncertainty" in the forecast, it added.

The February report raised EIA's forecast for Q1 Henry Hub natural gas spot prices by 52 cents to $4.34/MMBtu. The Q2 forecast also rose 4 cents from the previous month's estimates to $3.82/MMBtu, and the full year 2022 estimate climbed 13 cents to $3.92/MMBtu. The agency, however, estimated 2023 prices would be lower, averaging $3.60/MMBtu.

"We expect natural gas prices could remain volatile over the coming months, and the way that temperatures affect natural gas demand in February and March will be a key driver of how inventories end the withdrawal season, which will be important for natural gas price formation in the coming months," the report said.

EIA expected gas consumption will average 105.2 Bcf/d in February, 3% below February of 2021, driven by residential and commercial sector declines. Power sector consumption in February is expected to be down 1% from the prior year, partly offset by a 4% increase in industrial sector consumption.

LNG effects

The agency cited the role of US LNG exports in "limiting some of the downward pressure" on US gas prices, amid lower-than-average European inventories and large prices differences between Henry Hub and spot prices in Europe and Asia.

"We expect high levels of US LNG exports to continue into 2022, averaging 11.3 Bcf/d for the year, a 16% increase from 2021," the outlook said. "The forecast reflects our assumptions that global natural gas demand remains strong and that expected additional US LNG export capacity comes online."

The colder start to the year pulled gas inventories below the five-year average, ending the month at 2.3 Tcf. With a drop of about 730 Bcf/d exected for the rest of the withdrawal season, EIA expects inventories to end March at 1.6 Tcf, or 8% below the five-year average.

Turning to production, EIA lowered lowered by 540 MMcf/d to 103.67 Bcf/d its total natural gas marketed production estimate for the US in the first quarter. But it kept its Q2 production forecast roughly flat, lowering it by 10 MMcf/d to 103.78 Bcf/d.

In January, it said dry gas production was down 2.1 Bcf/d from December levels, in part due to freezing temperatures in some regions.

But EIA expected growth ahead.

"We forecast [dry] natural gas production to average 95.6 Bcf/d in February and 96.1 Bcf/d for all of 2022, driven by natural gas and crude oil price levels that we expect will be sufficient to support enough drilling to sustain production growth," the outlook said.

Nonetheless, total marketed production is expected to average 104.39 Bcf/d in 2022 and 106.55 Bcf/d in 2023, up from 101.45 Bcf/d in 2021. The average annual estimates for 2022 and 2023 exceeded the prior month's forecasts by 70 MMcf/d and 460 Mcf/d respectively.

Growing renewables

Turning to the power side, EIA said that despite expected declines in the cost of gas delivered to generators, the share of gas in the generating fuel mix is expected to decrease from 37% in 2021 to average 35% in 2022 and 2023, because of growth in renewables.

"EIA expects that renewable sources will provide 22% of US electricity generation in 2022 and 24% in 2023, up from 20% in 2021," the agency said. It highlighted utilities' plans to add 12 GW of wind power capacity and 46 GW of utliity-scale solar over the next two years.

Solar additions are expected to account for nearly half of new generation in 2022, EIA said, and small-scale solar is also seen growing 4.4 GW annually in 2022 and 2023.

Renewables are also seen eating into the share of coal-fired generation, which is estimated to decline to 22% over the next two years from 23% in 2021.