U.S. natural gas prices have jumped more than 20 percent from an early April low and are set to rise through the rest of the year despite high market volatility this week.
Natural gas demand is expected to start recovering in the coming weeks as states ease lockdowns and as demand for cooling rises in the summer months. In addition to expectations of higher demand, the supply of natural gas in the U.S. is dropping as gas producers lower production amid low prices while oil producers scale back oil output and with it – associated natural gas production from oil-directed wells.
Higher demand than the current lows amid the lockdowns and the so-called ‘shoulder season’ for natural gas consumption for heating or cooling, combined with the decline in production, will lead to higher natural gas prices later this year, according to analysts and traders.
Early in April, the benchmark price of natural gas at the Henry Hub had dropped to as low as $1.552 per million British thermal units (MMBtu).
Since then, prices have increased by 22 percent. Despite high volatility this week, which is expected to continue, traders are betting on higher prices due to the drop in production--including in associated gas output--as oil companies slash spending and idle rigs in response to the low oil prices.
On Tuesday, natural gas prices jumped to a 16-week high after an explosion at Enbridge’s Texas Eastern Natural Gas system in Kentucky had the company shut in the impacted section of the pipeline.
After most of the gas flow was re-routed, natural prices slumped by 9 percent on Wednesday – the biggest one-day drop in more than a year – amid signs that the lockdowns are destroying demand.
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Then on Thursday, prices fell by 2.6 percent to settle at $1.894/MMBtu, after the EIA reported larger-than-normal weekly net gas injections into storage.
The net injections to working gas totaled 109 billion cubic feet (Bcf) for the week ending May 1, the EIA said, adding that working natural gas stocks totaled 2,319 Bcf—up by 52 percent compared to the year-ago level and 21 percent higher than the five-year average for this week. But total working gas is within the five-year historical range.
Going forward, natural gas prices are set to see upward pressure from falling dry natural gas production and a pick-up in demand as lockdowns are relaxed, analysts say.
Natural gas output will drop the most in the Appalachian region because of low natural gas prices and in the Permian region, where low oil prices force producers to cut production, thus reducing associated gas output from oil-directed wells, according to EIA’s estimates in the April Short-Term Energy Outlook (STEO).
Moody’s last week maintained its medium-term price band for Henry Hub prices at $2.00-$3.00/MMBtu, “as an accelerated reduction in supply will help support recovery in natural gas prices in 2020.”
Oil-directed basins—including the Permian, the Eagle Ford, Anadarko, and the Bakken—have started to show signs of gas production losses, data analytics company Enverus said this week as it continues to expect “a significant decline in gas production in 2020.”
“Enverus forecasts prices will exceed $4/MMBtu and could reach $4.50/MMBtu as early as the coming winter. Longer term, natural gas prices are expected to average $2.80/MMBtu; this level allows gas production growth to meet expected demand gains,” Enverus said in its report.
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Natural gas is the potential winner from the drop in oil-associated production, Saxo Bank said in a report this week.
Traders also seem to think that natural gas prices will rise. Hedge funds have boosted their bullish bets on natural gas, and the net long position reached a one-year high in the week to April 28, Ole Hansen, Head of Commodity Strategy at Saxo Bank, said at the beginning of this week, commenting on the commitment of traders report.
“Natural gas continued to be bought with the combined net long in four Henry Hub deliverable futures and swap contracts reaching a one-year high. Natural gas futures capped its best month in April since November 2018 with associated production from oil wells expected to shrink as drillers make deep cuts to production,” Hansen said.
By Tsvetana Paraskova for Oilprice.com
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