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US EIA trims gas production forecasts once again on lower prices, curtailments

Highlights

Expected Q3 gas marketed production down 0.83 Bcf/d to 94.15 Bcf/d

Q3 Henry Hub spot gas price forecast down 25 cents to $1.65/MMBtu

Washington — The US Energy Information Administration July 7 again lowered its estimates for natural gas marketed production for the rest of 2020, pointing to low gas and oil prices and production curtailments, but it anticipated a pickup in production toward the second half of 2021, as prices rebound.

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The agency, in its July Short-Term Energy Outlook, lowered by 830 MMcf/d to 94.15 Bcf/d its gas marketed production estimate for the US in the third quarter of 2020, and trimmed Q4 estimates as well by 390 MMcf/d to 92.16 Bcf/d.

"EIA forecasts that US natural gas production will decline 3% in 2020 as a result of decreased drilling activity and production curtailments caused by falling natural gas prices," said EIA Administrator Linda Capuano, in a statement accompanying the outlook's release.

The report said declines in gas marketed production would be greatest in the Permian Basin, as the drop in drilling activity and low crude oil prices reduce associated gas from oil-directed wells. The low point for dry gas production is seen as likely in Q2 2021, averaging 13.2% below the Q4 2019 peak. Then as Henry Hub prices rise and economic conditions improve, EIA said it expects dry gas production to grow again, hitting 85.6 Bcf/d in Q4 2021.

Natural gas consumption estimates for the rest of the year, by contrast, were pushed up in the July outlook. The agency raised Q3 estimates by 1.78 Bcf/d to 75.02 Bcf/d, and Q4 estimates by 940 MMcf/d to 84.24 Bcf/d.

Overall, however, gas consumption is expected to decline 3.1% in 2020, driven by industrial sector consumption pulled down by coronavirus pandemic mitigation and a sluggish economy.

"Natural gas consumption will decrease a further 5% in 2021, as rising natural gas prices make the fuel less competitive in the electric power sector, offsetting increases in consumption in the industrial, commercial, and residential sectors," Capuano said.

US LNG exports also are seen averaging 2.6 Bcf/d in Q3, down 1 Bcf/d form the last forecast, on lower global demand for natural gas.

HIGHER GAS PRICES AHEAD

Capuano noted that in June, weak demand offset production prices to keep Henry Hub prices low. Henry Hub natural gas spot prices averaged $1.63/MMBtu in June, the lowest average price since at least 1989.

But the agency forecast that declining production will put upward pressure on gas prices through the end of 2021. Henry Hub spot prices are forecast to average $1.93/MMBtu for full-year 2020 and $3.10/MMBtu in 2021, altered from the previous month's estimates of $2.04/MMBtu and $3.08/MMBtu, respectively.

In the near term, EIA lowered its forecast for Q3 Henry Hub spot prices by 25 cents to $1.65/MMBtu, and the Q4 forecast fell 16 cents from the previous month's estimates to $2.46/MMBtu.

CHANGING FUEL MIX

Buoyed by lower natural gas prices in 2020, gas use in the power sector is forecast to average 31.9 Bcf/d, 2.9% above 2019 levels, and gas-fired generators are seen supplying 41% of total US electricity generation in 2020. But gas use for generation is seen declining 14.3% in 2021 on increased competition from renewables and coal, as renewable capacity is added and higher spot gas prices give coal an edge, the outlook said.

Thus far, coal-fired generation has been falling faster than the level of demand due to competition from other sources, EIA said. Coal is expected to make up 18% of the generating fuel mix in 2020, down from 24% in 2019.

EIA expects the share from non-hydro renewables to rise to 13% in 2020, compared with 11% in 2019.

Overall, EIA sees US electricity consumption declining 4% in 2020, with commercial and industrial retail sales declining by 7% and 5.6%, respectively, while residential retail sales hold steady. In 2021, EIA is forecasting 1% growth in electricity consumption, with heightened uncertainty related to coronavirus mitigation.

"The stay-at-home orders in the late spring months especially affected commercial businesses such as restaurants, hotels and similar establishments because they were required to cease operations," the agency said, noting its most recent surveys showed commercial electricity sales in April were 11% lower than a year earlier. It estimated that similar year-on-year declines occurred in May and June.