The U.S. natural gas market is predicted to be oversupplied this year from a warmer-than-normal start to the year and declining demand, which are likely to suppress prices into 2024.
Energy analysts trimming their domestic natural gas price forecasts include BMO Capital Markets, Goldman Sachs Commodity Markets, Jefferies and Tudor, Pickering, Holt & Co. (TPH).
“For Henry Hub, we are lowering our 2023 estimate to $3.10/MMBtu from $3.60 and our 2024 assumption falls to $3.70 from prior forecast of $4.50,” BMO Capital Markets analysts said.
The analyst team led by Randy Ollenberger noted that domestic natural gas prices have slumped since the start of the year. The analysts pointed to lower international gas prices, the delayed restart of Freeport LNG and the warm winter.
“The U.S. Energy Information Administration (EIA) expects U.S. natural gas demand to decline to 86.4 Bcf/d in 2023 from 88.4 Bcf/d in 2022, largely driven by lower demand in the industrial sector,” the BMO analysts said.
EIA earlier this month forecast Henry Hub to average around $3.00 in 2023, down 50% year/year. In February, EIA had modeled an average Henry Hub spot price in 2023 of $3.40.
Meanwhile, U.S. dry gas production is likely to inch up.
‘Infrastructure Limitations’
“We expect U.S. dry gas production to grow from 97.2 Bcf/d in 2022 to roughly 100 Bcf/d in 2023,” the BMO analysts said. “We do not expect material growth in Appalachia due to pipeline constraints, while growth in the Permian could also be limited by lower activity and infrastructure limitations.”
The BMO outlook assumes U.S. liquefied natural gas exports will average 12.8 Bcf/d this year, versus 10.6 Bcf/d in 2022. The gains would result from Freeport exports resuming and Europe maximizing its imports.
There may be some “upside” in global LNG prices, according to BMO. That could happen “if Europe and China are forced to compete for volumes. However, North America looks to be well supplied and storage levels should build to normal or above-normal levels.
“As a result, we see limited upside for North American natural gas prices in the near term.”
Domestic gas prices also are forecast to be pressured from Western Canada’s marketable production.
“We expect Western Canada marketable natural gas production to increase from roughly 17.2 Bcf/d in 2022 to 18 Bcf/d in 2023 and 18.6 Bcf/d in 2024,” the BMO analysts said. “Demand for natural gas in Western Canada is expected to grow modestly, resulting in more gas available for export.
“We believe that the growth in production could put pressure on the Henry Hub-AECO basis spread, especially in the second half of the year and 2024.”
Are We There Yet?
In the Goldman forecast, analysts questioned whether the United States has yet found a bottom in natural gas prices.
The analysts said they think the gas-weighted U.S. exploration and production companies “are pricing in a $3.20-3.40/MMBtu gas price at an 11.3% discount rate versus our mid-cycle view of $3.50, 2024/2025 gas futures at $3.85/4.30.”
Goldman’s mid-cycle gas price “is based on our expectations for 15% returns from the Haynesville Shale. We believe the combination of associated gas growth (primarily from the Permian), and growth from South Texas and Haynesville will be sufficient to meet the incremental demand from the next wave of LNG demand.”
A more positive view on gas prices could come, the Goldman analysts said, if they saw “further confidence in disciplined growth from gas producers; and confidence in the development of the next wave of LNG export terminals.” Goldman’s base case assumes 20 Bcf/d of LNG exports by 2028 versus 13 Bcf/d today.
“However, we acknowledge we are likely to move above mid-cycle in 2025, given the need for acceleration in activity, given strong demand growth from LNG export additions, and following our expectations for a supply response in 2023/24,” the Goldman analysts said.
Jefferies energy analysts also said the near-term outlook for domestic gas prices is not positive.
“We expect 2023 to remain a weak year for U.S. natural gas prices due to robust North American supply growth,” the Jefferies analysts said. “Natural gas inventories sit 22% above the five-year average, and even with announced rig cuts and supply curtailments, we expect inventories to end the year above the five-year average.”
That said, the analysts are assuming a natural gas price of $3.14 for 2023 and $3.69 for 2024.
“The long-term U.S. natural gas story is tied to core industrial demand and the transition away from coal, while backstopped by the buildout of LNG export capacity,” according to Jefferies.
In the near term, supply is rising, with “Haynesville production/scrapes continuing to push higher…Despite natural gas hitting sub $2/Mcf in late February and companies indicating rig/completion reductions, the numbers have not shown it, yet.
“Given a normal-weather summer (or even one standard deviation hotter), natural gas futures likely need to incent shut-ins through the summer,” the Jefferies analysts said. “Natural gas prices may need to settle below $2/Mcf for multiple months.”
Returns Marginal In Best Acreage?
Meanwhile, TPH analysts recently updated their natural gas price model for 2023 to $2.89. TPH analyst Matt Portillo said the “strip move will continue to pressure drilling activity as returns are marginal even for the best acreage” in the gassy Haynesville.
“It will be interesting,” Portillo wrote in a note, “to see if upstream operators in both oil and gas basins are going to be willing to continue to pay service costs that are more akin to $80 oil and $5 gas, but as things stand, the combination of skyrocketing service cost inflation since 2020 and a plunge in natural gas prices has decimated well level returns in basins like the Haynesville.”
He explained that the last time gas prices were at the levels they are today (in 2020 during the pandemic), TPH estimated the cost to drill and complete wells “for select operators was 30-40% cheaper.”
Current wells in the Haynesville now are averaging $1,500-2,000/foot or more, with 10,000-foot laterals costing $15,000-20,000/per foot or more.
“From a returns perspective, wells in the basin are sensitive to the move in the near-term gas strip, given lack of liquids production, with 25-30% of the life of well estimated ultimate recovery produced in year one and 40-45% by the end of year two.
“All told,” Portillo said, “with 2023 strip now approaching our fundamental targets of $2.75/MMBtu, prompt at $2.20 and further downside risk to the 2024 curve, we continue to expect a material drop in Haynesville drilling activity over the coming months, as cash flows and returns do not justify development with commodity prices at these levels.”
