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US EIA lowers Q4 Henry Hub spot gas price forecast 27 cents to $2.66/MMBtu

The main energy-data-gathering arm of the U.S. government has dropped earlier estimates of natural gas demand and pricing, cutting its fourth-quarter forecasts for consumption by 1 Bcf/d and spot market prices by 27 cents/MMBtu.

In the monthly Short-Term Energy Outlook, released Dec. 8, the U.S. Energy Information Administration said U.S. demand would average 86.59 Bcf/d and Henry Hub prices would come in at $2.66/MMBtu for October through December. Both were significant reductions from what the agency assumed just a month ago in its November report.

The EIA now saw demand averaging 83.4 Bcf/d this year, down 2% from 2019. The decline "reflects warmer [temperatures] in 2020 compared with 2019 that lowered residential space heating demand for natural gas despite many staying home in response to the pandemic," the report noted.

Residential demand in 2020 should average 12.9 Bcf/d, down 0.8 Bcf/d from last year, while commercial demand is expected to average 8.6 Bcf/d, down 1 Bcf/d from 2019. The EIA forecast industrial consumption will average 22.5 Bcf/d in 2020, down 0.5 Bcf/d from 2019, a result of reduced manufacturing activity.

Looking ahead to 2021, the EIA expected total U.S. consumption will average 79.4 Bcf/d for the year, down 4.8% from 2020. "The forecast decline in 2021 results from rising natural gas prices that lower forecast natural gas demand in the electric power sector," the report explained.

The Henry Hub price averaged $2.61/MMBtu in November, up 22 cents from October, the EIA said, noting the increase was "moderated by significantly warmer-than-normal [temperatures], which reduced residential space heating demand for natural gas despite many remaining at home in response to the pandemic."

The EIA now expected spot prices to average $3.10/MMBtu in January, a drop of 32 cents from the November report.

"Although EIA still expects prices to increase in the coming months because of rising space heating demand and rising U.S. liquefied natural gas exports ... amid declining U.S. natural gas production, the lower January price forecast reflects higher forecast storage levels this winter compared with last month's forecast," the report said.

The EIA expected that monthly average spot prices will average $3.01/ MMBtu in 2021, which is up from the forecast average of $2.07/MMBtu for 2020.

The expected rise in gas prices is seen dragging the share of gas used for electric generation down to 34% in 2021 from 39% in 2020, EIA said. The decline makes room for a slight rebound in coal generation, back to its 2019 level of 24% of the generation mix in 2021, following a drop to 20% in 2020.

Gas storage

U.S. working natural gas in storage ended October at nearly 4 Tcf, 5% above the five-year average and the second-highest end-of-October level on record.

The agency estimated that inventories fell 20 Bcf in November, compared with a five-year average November withdrawal of 103 Bcf and a forecast withdrawal of 222 Bcf in last month's report. "The lower-than-expected withdrawal is the result of warmer-than-normal November temperatures that reduced natural gas use for space heating," it said.

But expected declines in U.S. natural gas production this winter compared with last winter will more than offset the declines in natural gas consumption, which will contribute to inventory withdrawals outpacing the five-year average during the remainder of the winter season that ends in March, the EIA said.

The EIA now expected gas inventories to end March 2021 at 1.6 Tcf, 15% below the 2016–2020 average.

Dry gas production will average 90.9 Bcf/d in 2020, down from 93.1 Bcf/d last year, the EIA continued, adding that production should average 87.9 Bcf/d in 2021.

"EIA expects production to begin rising in the second quarter of 2021 in response to higher natural gas and crude oil prices," the agency said. "The increase in crude oil prices is expected to raise associated gas production from oil-directed wells in late 2021, especially in the Permian region."

LNG exports

The report also pointed to the strong performance of U.S. LNG exporters, noting that a total of 9.4 Bcf/d was exported in November, the most for any month on record. "International spot and forward LNG prices continued to increase in late November, supported by reduced global LNG supply because of outages at LNG export plants in several countries and reported congestion at the Panama Canal, which affected westbound U.S. LNG exports to Asia," the EIA said.

The EIA expected LNG demand to continue to climb primarily due to forecasts of colder-than-normal winter weather in Northern Asia and Europe and coal plant closures in South Korea that could increase demand for natural gas for power generation.

U.S. LNG exports will exceed 9.5 Bcf/d from December through February and average 8.5 Bcf/d in 2021, a 30% increase from 2020, the EIA predicted.

The agency cautioned that its recent outlooks are "subject to heightened levels of uncertainty because responses to COVID-19 continue to evolve. Reduced economic activity related to the COVID-19 pandemic has caused changes in energy demand and supply patterns in 2020 and will continue to affect these patterns in the future."

Christopher Newkumet is an editor and Jasmin Melvin is a reporter with S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.