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Economic rebound, lower storage seen pushing winter gas prices up: NGSA

Highlights

Production expected 4% higher, winter over winter

Gas exports seen up 17%, industrial demand 4%

Returning economic growth and decreased storage inventories are expected to place upward pressure on US natural gas prices in the coming winter, despite resurgent production, the Natural Gas Supply Association said Oct. 7 in its annual winter outlook.

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"This winter the economy should continue its recovery from the shock of 2020 and COVID-19," said David Attwood, NGSA chairman and ExxonMobil vice president of the Americas, gas optimization and trading, in a briefing on NGSA's 2021-2022 Winter Outlook for Natural Gas, released the same day.

The trade group's outlook is based on five factors: economy, weather, overall demand, supply and storage. It draws on data from Energy Ventures Analysis and the US Energy Information Administration for demand and supply projections, and Moody's Analytics, Bureau of Labor Statistics, the University of Michigan, and Energy Ventures Analysis for its economic projections.

This year's report pointed to upward pressure on gas prices -- which averaged $3.09/MMBtu at Henry Hub last winter -- emerging from forecasts of GDP growth of 10% and considerably lower storage levels, 3% below the five-year average.

Nonetheless, NGSA assessed "neutral pressure" on prices from the demand side, with customer demand at 111.9 Bcf/d, 1% above the prior winter, mostly driven by exports and a more robust industrial sector.

Gas exports were expected to be up 17%, with LNG exports estimated to reach 12.0 Bcf/d in winter 2021-2022, compared with 10.3 Bcf/d the prior season, and pipeline exports to Mexico at 6.4 Bcf/d, up from 5.4 Bcf/d. Industrial demand was estimated to reach 24.9 Bcf/d this winter, up about 4% from 23.9 Bcf/d a year earlier, according to the outlook.

'Careful pace' for production

On the supply side, the outlook expected increases in production this winter, with the daily average up 4% or 3.7 Bcf/d above last year winter, putting downward pressure on prices.

"Production growth is increasing at a careful pace, not too exuberant, because of continued uncertainty caused by COVID," Attwood said. He pointed to higher rig counts and the returning contribution of associate gas.

"In the downturn, we saw a buildup in the inventory of [drilled but uncompleted wells] and we're seeing completion of those DUCs -- that's a drawdown in that inventory," he added. "And we also see supply increase due to the service of several pipelines has helped run natural gas from the Permian to the market."

Also affecting the production climate is uncertainty in the regulatory environment around pipeline certificates, the possibility of a fee on methane, and whether there will be a carbon market or a variation of such policy, he said.

According to Attwood, producers have responded to market signals, but in the Northeast, there have been delays and cancelations in pipeline infrastructure intended to ease congestion and narrow the price differences between producing regions and demand centers.

NGSA put the cumulative Northeast pipeline cancelations at 4.76 Bcf/d, with delayed projects also putting off 2.4 Bcf/d in capacity. Transcontinental Gas Pipe Line's Leidi South Expansion pipeline project, at 600 MMcf/d, will be the only Northeast pipeline that comes online in the 2021-2022 season, Attwood said.

On the demand side, residential and commercial demand is projected to stay flat, amid increased efficiency, according to the outlook.

Coal-to-gas switching

Electric sector demand for gas is seen decreasing by about 8% or 2.2 Bcf/d, due to short-term economic switching from gas to coal, given expected higher gas prices than last winter. The estimated capabilities for such switching from coal to gas in 2022 is estimated at between 2.5 Bcf/d and 3.5 Bcf/d in 2022, down from about 6 Bcf/d in 2017, Attwood said.

Attood cited a net gain of 400 MW of structural gas-fired generation capacity additions, when gas steam turbines retirements are also taken into account. Coal retirements were seen at 20 GW for 2021-2022.

"New gas-fired capacity additions are mostly concentrated in the East, Midwest and South Central as these regions are close to low-cost gas resources and are still experiencing some growth in electricity demand," he said.

NGSA expected a 4% or 1 Bcf increase in industrial sector demand this winter due to higher utilization of facilities as the economy recovers.

The biggest wildcard in the outlook was the COVID-19 trajectory and its impact on economic recovery, Attwood said, adding that LNG exports also remained a potential driver of changes as does weather.

Regional swings were also possible.

"Because of infrastructure constraints[and] state policies, there's always the possibility that regional infrastructure constraints, perhaps in California or Northeast, could cause short-term price spikes in areas with constrained pipeline capacity," Attwood said.