IHS Markit : U.S. Natural Gas Price Will Fall to Levels Not Seen Since 1970s

Natural gas will drive the 2020 average price at the Henry Hub down (in real terms) to a level not seen in decades, according to new report from IHS Markit. The oversupply, reinforced by a new surge in associated gas production from the Permian basin, will push the average price down below $2/MMBtu for the year according to IHS Markit. That would be the lowest prices have averaged in real terms since the 1970s. In nominal terms, the last time that prices fell below $2 was 1995.

Prices are expected to fall despite robust domestic demand as well as rising levels of exports. The U.S. is expected to export an additional 3 Bcf/d of liquefied natural gas (LNG) in 2020 according to HIS Markit.

It still will not be enough to absorb production that has grown by more than 14 Bcf/d since January 2018. IHS Markit expects production to average more than 90 billion cubic feet per day in 2019 and 2020, IHS Markit said.

“It is simply too much too fast,” said Sam Andrus, executive director, IHS Markit who covers North American gas markets. “Drillers are now able to increase supply faster than domestic or global markets can consume it. Before market forces can correct the imbalance, here comes a fresh surge of supply from somewhere else.”

Two key factors will drive the Permian surge will be associated gas and additional pipeline capacity is expected to alleviate transportation constraints. The Gulf Coast Express pipeline, scheduled to come online in October, will allow for an additional 2 Bcf/d production capacity. Overall, Permian gas takeaway capacity is expected to increase 6 Bcf/d through 2022.

Eventually the downward pressure on prices from rapid growth of associated gas will curtail drilling activity and bring the market back into balance. IHS Markit expects prices to rebound and average $2.25 per MMBtu for 2021, though that figure is still a downgrade from previous estimates.