EIA’s Short Term Energy Outlook now says production declines would result in higher prices and a need to destroy some demand.
As gas production comes off-line it sets the U.S. up for a tighter market toward the end of the year and will remain as such through 2021. One factor that has the potential to upset this trend is how long prices remain depressed. If crude or gas rallies and U.S. production picks back up that may limit how high gas prices could go. Additional production declines are highly probable, if not certain. But the degree of declines into the end of the year and 2021 will help determine how tight the 2021 natural gas balance is.
The U.S. Energy Information Agency (EIA) released its updated Short-Term Energy Outlook (STEO) report for May on Tuesday, May 12, 2020. The report contained several revisions from last month’s report as energy and macro-economic conditions are surrounded by uncertainty. Social distancing measures and travel restrictions continue to have a detrimental impact on global energy demand.
STEO Highlights and AEGIS Interpretation
Less supply than previously forecast. Higher prices, less demand to keep the market in balance.
In April, Henry Hub prices had averaged around $1.73. However, according to the EIA prices will gradually recover through the remainder of the year, bringing the 2020 average to $2.14 – up 3c from the $2.11 estimated in the April report. In 2021, natural gas prices are expected to increase further to $2.89, according to the EIA. The EIA explained that their revision in price comes as production is expected to fall dramatically over the next two years.
Production: Output would drop 10 Bcf/d by December this year.
The U.S. produced 92.2 Bcf/d of gas in 2019, reaching a peak production rate of 95.88 Bcf/d in December. In the agency’s May report, they estimate that December 2020 production will be around 85.38 Bcf/d, a year-over-year decline of 10.5 Bcf/d. The EIA’s last several reports have shown a decline in gas production for 2020, with May’s report estimating U.S. dry gas production will be around 89.84 Bcf/d: a revision of -2% from last month’s figure of 91.7 Bcf/d. In 2021, EIA sees gas production decreasing further by 4.95 Bcf/d, bringing dry gas production to 84.49 Bcf/d.
Associated gas from oil plays leads declines, but gas basins contribute, too.
The EIA expects gas production to decline due to low prices for both oil & gas. The Permian basin and the Appalachian basin are most likely to be impacted by production curtailments. Low oil prices have already begun to force producers to start shutting-in oil-directed rigs in the Permian. Additionally, low gas prices are discouraging producers from drilling gas-directed wells in the Appalachian basin.
Demand losses in 2020 from social distancing. Losses in 2021 are price-driven.
On the demand side of the equation, the EIA significantly revised several key figures. The agency expects U.S. total consumption to decrease by 3.28 Bcf/d in 2020 – doubling the expected decrease in consumption of 1.18 Bcf/d stated in April. In the April report, the EIA stated U.S consumption was expected to be 83.79 Bcf/d. In the most recent report, the EIA stated natural gas consumption is expected to be 81.69 Bcf/d. This revision of 2.1 Bcf/d, or -2.5% comes as we have started to see the impact COVID-19 has on natural gas demand.
Industrial demand hit hard by COVID-19
The sector most affected by COVID-related restrictions is the U.S. industrial sector. The EIA’s U.S. Manufacturing Production Index dropped by -10.8%, a metric that shows the impact of shutdowns caused by COVID-19 and supply-chain interruptions. The U.S. Industrial Sector is expected to reduce consumption by 1.6 Bcf/d from 2019 levels. In the April report, the sector was only expected to lose 0.07 Bcf/d of consumption. This stark revision can be attributed to stay-at-home orders and the lengthening of the anticipated economic impact of COVID-19.
LNG exports rise, but utilization is reduced
The second sector EIA expects to be most greatly impacted is U.S. LNG exports. The report estimates U.S. LNG exports will average 6.0 Bcf/d in 2020 and 7.3 Bcf/d in 2021. Although these levels still represent year-over-year increases, the rate of growth in exports is expected to decline from 67.9% year-over-year in 2019 to 21.1% in 2020 and 21.2% in 2021. This is consistent with the recent news of LNG cargo cancellations in the near-term, as well as delayed cargoes being pushed out as far as a year. The EIA briefly touched on international natural gas prices, stating that importing benchmarks such as NBP, TTF, and JKM will have to rally before LNG exports rebound, which is heavily dependent on the easing of COVID-related restrictions.
Using our comparison tool on the right you can see the changes made to the supply-demand balance since the report was last published in April. By utilizing the vertical slider you can see the differences between the April and May reports. Both supply and demand estimates were revised to reflect the developments to the market that have occurred during the past month. In the May report, supply is down by several Bcf/d throughout the entire curve as producers have continued to announce supply cuts. Demand has also been updated to reflect the destruction caused by COVID-19 and the expected length in time it will take for the markets to recover.