The benchmark U.S. natural gas price has nearly doubled over the past year. The front-month Henry Hub contract jumped from $2.406 per million British thermal units (MMBtu) at the beginning of September 2020 to as much as $4.606/MMBtu early on September 2, 2021. Prices have rallied despite the fact that the biggest gas-producing basin, Appalachia, saw in the first half of 2021 its highest average output since natural gas production in the Marcellus and Utica shale formations started in 2008.
Appalachia is breaking production records, so why U.S. natural gas prices are soaring?
U.S. natural gas production in the other shale basins is not recovering from the pandemic-induced slump last year as fast as in Appalachia. In the Permian, fewer oil-directed rigs are pumping less associated gas.
Overall American dry natural gas production is rising. But it's not increasing so quickly as to offset surging U.S. gas exports via pipelines and liquefied natural gas (LNG) cargoes, which have been setting all-time high records this year. Scorching summer heat waves and low natural gas inventories have also driven natural gas prices higher over the past few months.
Moreover, major gas producers in Appalachia are holding off on splurging on budgets to boost production too much, expecting stronger price signals in the futures curve a year and two from now.
Appalachia's Supply Record Can't Offset Demand-Side Surge
The Appalachian Basin, which accounted for a third of all U.S. natural gas production in H1, saw its production average 31.9 billion cubic feet per day (Bcf/d) during the first half of 2021—the highest average output for a six-month period since production began in 2008, the EIA said this week.
If the Appalachian Basin were a country, it would have been the world's third-largest natural gas producer in the first half of 2021, behind Russia and the rest of the United States.
However, the rise in gas output in Pennsylvania, West Virginia, and Ohio has not been weighing on the benchmark U.S. prices because gas inventories are running below average and will enter the winter heating season at below-average volumes, following major above-average withdrawals this year, especially during and after the Texas winter storm in the middle of February.
Then, there is the trend of record-breaking U.S. LNG exports amid soaring demand and the highest spot LNG prices in Asia in years.
Higher natural gas prices this year primarily reflect two factors: soaring LNG exports and rising domestic natural gas consumption for sectors other than electric power, the EIA said in its August Short-Term Energy Outlook (STEO).
The average price for the front-month contracts in July was $3.82/MMBtu, the highest July average since 2014, as per EIA estimates, as cooling demand—especially in the Pacific and Mountain regions—jumped and the number of cooling degree days in July was 9 percent higher than the 10-year average.
At the same time, U.S. natural gas exports (pipeline and LNG) also increased, from 17.8 Bcf/d in June to 18.2 Bcf/d in July, while natural gas production declined slightly from 92.7 Bcf/d in June to 92.5 Bcf/d in July. The Henry Hub price rallied 17.9 percent from June to July, registering the largest month-on-month percentage change for June to July since 2012, when the price jumped by 20.3 percent.
Top U.S. Natural Gas Producers Not Planning Production Surge
The price has also been supported by expectations that some of the largest public natural gas producers will not be rushing to significantly raise output until they see $3/MMBtu futures prices two and three years out.
"[I]t would require a strip that's got some length to it, probably two to three years out at a gas price that's north of $3," Toby Rice, president and CEO at EQT Corporation, said on the Q2 earnings call in July.
Even if EQT sees the opportunity to boost output, it would still be "very modest" below-5-percent growth, Rice added.
"When you compare the short-term gains you can get from accelerated activity or compared to the alternative, we'll choose the alternative," the executive noted.
Clay Carrell, Executive Vice President and COO at Southwestern Energy Company, said "we want to be sure that we're not taking it a transient increase and putting it into strategic decision."
Modest growth forecasts from executives amid bullish demand-side factors prompted investment banks such as JP Morgan and Goldman Sachs to significantly raise their outlook of Henry Hub prices this year and next.
Goldman Sachs hiked their price forecast for the heating season by 13 percent to $3.50/MMBtu, as well as for next summer and winter, The Wall Street Journal reports.
JP Morgan analysts were surprised by the quick rally to $4/MMBtu.
"The U.S. natural-gas market has found itself in an uncomfortable situation of potentially entering the winter withdrawal season with the lowest level in storage since 2018," JP Morgan said in a note last month carried by the Journal.
JP Morgan sees Q4 prices averaging $3.80/MMBtu, a major upgrade compared to the previous forecast of $3.10/MMBtu.
Natural Gas Inventories Are Below Average
The EIA expects the Henry Hub spot price will average $3.71/MMBtu in Q3 and $3.42/MMBtu for all of 2021, before easing to average $3.08/MMBtu next year amid rising domestic production.
Prices would ease this month and next if mild weather forecasts materialize, but come the heating season in November, natural gas prices could rise again, considering that the inventories will end the injection season at end-October at 3.6 Tcf, or 4 percent below the five-year average, as per EIA estimates.
"Above-average withdrawals of natural gas from storage in the 2020–2021 winter heating season and below-average injections into storage this summer contributed to our forecast of below-average inventories of natural gas, along with relatively flat dry natural gas production and high natural gas exports," the EIA said last month.
Some analysts do not rule out $5/MMBtu natural gas price.
From a technical analysis perspective, "Still see the potential for a run to $4.742-4.818-4.836, $5.000, even $5.354-5.410-5.517-5.600 if the $4.526 high can be breached before support is broken," ICAP Technical Analysis analyst Brian LaRose told Natural Gas Intelligence.
By Tsvetana Paraskova for Oilprice.com
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