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US EIA slashes early 2022 gas price forecast citing fall storage build pickup

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US EIA slashes early 2022 gas price forecast citing fall storage build pickup

Highlights

Lowers Q1 Henry Hub spot gas price forecast by 66 cents

Q4 gas marketed production estimate rises by 0.74 Bcf/d

LNG export growth continues into 2022

The US Energy Information Administration Dec. 7 lowered its estimates for US natural gas prices in early 2022, following storage injections this fall that outpaced the prior five-year average.

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"We forecast natural gas spot prices at Henry Hub will average $4.58/MMBtu in [first-quarter 2022], compared with a forecast of $5.24/MMBtu in the November [outlook]," EIA said in its December Short-Term Energy Outlook. "The lower forecast reflects our expectation that US natural gas inventories will finish the withdrawal season at the end of March at a higher level than previously expected."

EIA lowered its forecast for Q4 Henry Hub natural gas spot prices 52 cents to $5.02/MMBtu. The Q1 forecast also fell 66 cents from the previous month's estimates to $4.58/MMBtu.

Nonetheless, EIA continued to expect gas prices to remain volatile in the coming months because of uncertainty around seasonal demand, with winter temperatures a key driver.

In November, mild weather across much of the country resulted in a lower-than-expected use of gas for space heating, although continued high global demand for LNG mitigated the pressure, the outlook said.

EIA forecast inventory draws this winter will be similar to the five-year average, with inventories ending March below 1.7 Tcf, or 2% below the five-year average for that time of year.

"[W]e expect that factor, along with rising US natural gas exports and relatively flat production through March, will keep US natural gas prices near recent levels before downward price pressures emerge," EIA said in the report.

The agency estimated that Henry Hub prices would average $3.97/MMBtu for full-year 2021 and $3.98/MMBtu in 2022, down from the previous month's estimates of $4.10/MMBtu in 2021.

Wildcards

On the demand side, the agency raised its gas consumption estimates 1.56 Bcf/d to 87.67 Bcf/d for Q4 and 700 MMcf/d to 97.47 Bcf/d for Q1.

In a statement accompanying this month's report, EIA Acting Administrator Steve Nalley acknowledged unknowns about the omicron variant of the coronavirus are creating a complicated environment for the entire energy sector.

"Our forecasts for petroleum and other energy prices, consumption, and production could change significantly as we learn more about how responses to the omicron variant could affect oil demand and the broader economy," he said.

The December outlook raised EIA's Q4 production estimate 740 MMcf/d to 103.72 Bcf/d while lowering the Q1 production forecast by 170 MMcf/d to 103.32 Bcf/d. Estimates for the full year 2022 were also trimmed by 730 MMcf/d to 104.14 Bcf/d on average. But the 2022 expectations still exceeded the 101.14 Bcf/d average estimated for 2021 and 98.91 Bcf/d calculated for 2020.

"[Dry] natural gas production in the forecast rises to an average of 95.3 Bcf/d during the rest of this winter (December–March) and averages 96 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 report said.

As for LNG exports, an increasingly important component of the US market, EIA expected continued growth from the 9.8 Bcf/d average estimated in 2021, with an average of 11.1 Bcf/d expected from December through March.

"We expect high levels of LNG exports to continue into 2022, averaging 11.5 Bcf/d for the year, a 17% increase from 2021, reflecting assumptions of high global demand and increased US LNG export capacity," EIA said.

Generation

On the power side, EIA forecast that gas would average 37% of the US generating fuel mix in 2021, an uptick from EIA's November forecast, but still down from the 39% in 2020. Further declines for gas, to 35% of the generating fuel mix are expected in 2022, stemming from the continued high cost of delivered gas for generators and growth of renewables, EIA said.

In 2021, EIA sees new solar and wind capacity additions "offset somewhat" by lower hydropower generation, keeping the overall share for renewables roughly level with last year, or 20%, before climbing to 22% in 2022. Coal-fired generation is seen climbing to 23%, on average, in 2021 before dropping slightly to 22% in 2022.

As for new capacity, EIA expects 17.2 GW of added wind capacity to come online in 2021 and 7.1 GW in 2022. Utility-scale solar is seen adding 16.2 GW in 2021 and 20.9 GW in 2022.