EIA Predicts Firm Natural Gas Prices

Coming off record production and consumption in 2019, the natural gas industry is poised for another big year in 2020 but it will not match last year because of the economic downturn caused by the coronavirus pandemic.

Natural gas prices at the wellhead have firmed since crashing in April dropping below $1 per million British thermal units (mmBtu) on the New York Mercantile Exchange during the second quarter. In West Texas, where there was a huge oversupply, prices dropped into negative territory but have increased to $2.49 at the Waha exchange on November 11.

The Energy Information Administration (EIA) expects rising domestic demand for natural gas and demand for LNG exports heading into winter, combined with reduced production, will cause Henry Hub spot prices to rise to a monthly average of $3.38 /mmBtu in January 2021. EIA expects that monthly average spot prices will remain higher than $3 throughout 2021, averaging $3.13 for the year, up from a forecast average of $2.07 in 2020.

Production declines combined with rising demand could create the “tightest gas market of the past decade,” according to Morgan Stanley. The investment bank forecasts inventories could draw down sharply this winter, “potentially eclipsing those of the 2013-14 polar vortex.” The bank hiked its price forecast for 2021 to $3.25 mmBtu, up from $3.05, and it also warned that there is upside risk of $5 if the weather turns out to be especially cold.

In 2019, dry natural gas production increased by 10 percent, or 8.7 billion cubic feet per day (Bcf/d), reaching a record high of 93.1 Bcf/d for the year. This increase was the second-largest volumetric increase since at least 1930 and second only to last year’s increase, EIA stated.

The two largest natural gas-producing states, Texas and Pennsylvania, also had the two largest increases in natural gas production in 2019. Texas annual average dry natural gas production increased 15 percent, from 19.3 Bcf/d in 2018 to 22.2 Bcf/d in 2019. Pennsylvania’s natural gas production increased 10 percent, from 16.9 Bcf/d in 2018 to 18.6 Bcf/d in 2019.

As U.S. natural gas production increased, the volume of natural gas exports—both through pipelines and as liquefied natural gas (LNG)—increased for the fifth consecutive year to an annual average of 12.8 Bcf/d. U.S. LNG exports accounted for most of this increase.

EIA said changing the fuel mix has reduced the carbon intensity of U.S. electricity generation. Natural gas has become the largest energy source for electricity overtaking coal. Greenhouse gas emission from electricity peaked in 2007 at approximately 2,500 million metric tons CO2 equivalent but declined to roughly 1,700 in 2019. EIA also noted between 2005 and 2019, total U.S. electricity generation increased by almost 2 percent while related CO2 emissions fell by 33 percent.

Alex Mills is the former President of the Texas Alliance of Energy Producers.