The US natural gas of reference price it has almost doubled in the last year. Henry Hub’s initial contract went from $ 2,406 per million British thermal units (MMBtu) in early September 2020 to $ 4,606 / MMBtu in early September 2, 2021. Prices have risen despite the largest gas-producing basin, Appalachia, seeing the highest average production in the first half of 2021 since natural gas production began at the Marcellus and Utica shale formations on 2008.
Appalachia breaks production records, why are US natural gas prices soaring?
Here’s why.
U.S. natural gas production in other shale basins is not recovering from last year’s pandemic-induced fall as quickly as Appalachian. In the Permian, fewer oil-targeted platforms pump less associated gas.
In general, American dry natural gas production is increasing. But it is not rising as fast as to offset the growth in U.S. gas exports through liquefied natural gas (LNG) pipelines and cargoes, which have been establishing all-time high records this year. Strong summer heat waves and low natural gas inventories have also pushed up natural gas prices in recent months.
In addition, the major gas producers in Appalachia are sticking to the investment in budgets to increase production too much, and expect stronger price signals in the futures curve in a year and two.
Appalachia’s supply record cannot compensate for the surge in demand
The Appalachian Basin, which accounted for one-third of U.S. natural gas production in H1, produced an average of 31.9 billion cubic feet per day (Bcf / d) during the first half of 2021, the highest average production of a period of six months. since production began in 2008, the EIA dit this week.
If the Appalachian Basin were a country, it would have been the world’s third largest producer of natural gas in the first half of 2021, behind Russia and the rest of the United States.
However, rising gas production in Pennsylvania, West Virginia and Ohio has not weighed on U.S. benchmark prices because gas inventories are operating below average and will enter the winter warming season in volumes below average, withdrawals above average this year, especially during and after the Texas winter storm in mid-February.
Then there is the trend for a record LNG exports to the United States amid growing demand and the highest spot LNG prices in Asia in years.
The increase in natural gas prices this year mainly reflects two factors: the increase in LNG exports and the increase in domestic consumption of natural gas for sectors other than electricity, the EIA dit to its August short-term energy outlook (STEO).
The average price of initial contracts in July was $ 3.82 / MMBtu, on July average highest since 2014, according to EIA estimates, as cooling demand, especially in the Pacific and Mountain regions, jumped and the number of cooling days in July was 9 percent higher than the average of ten years.
At the same time, US natural gas exports (pipeline and LNG) also increased, from 17.8 Bcf / d in June to 18.2 Bcf / d in July, while natural gas production decreased slightly from 92.7 Bcf / d in June to 92.5 Bcf / d in July. The price of the Henry Hub rose 17.9% from June to July, recording the largest month-to-month percentage change from June to July since 2012, when the price rose 20.3%.
Major American producers of natural gas that do not plan to increase production
The price has also been backed by expectations that some of the largest public producers of natural gas will not rush to significantly increase production until they see future prices of $ 3 / MMBtu two and three years out.
“[I]It wouldn’t take a strip that lasted a certain length, probably two to three years at a price of gas that is north of $ 3, ”said Toby Rice, president and CEO of EQT Corporation, dit to the Q2 profit call in July.
Even if EQT sees an opportunity to increase production, it would continue to be “very modest” growth below 5%, Rice added.
“When you compare the short-term gains you can get from accelerated activity or compared to the alternative, we will choose the alternative,” the executive noted.
Clay Carrell, Executive Vice President and COO of Southwestern Energy Company, dit “We want to make sure we don’t take a transitional increase and take it in a strategic decision.”
The modest growth forecasts for executives amid rising demand requested Investment banks such as JP Morgan and Goldman Sachs will significantly increase their outlook on Henry Hub prices this year and next.
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Goldman Sachs increased its price forecast for the heating season by 13 percent to $ 3.50 / MMBtu, as well as for the coming summer and winter, the Wall Street Journal reports.
JP Morgan analysts were surprised by the rapid recovery of $ 4 / MMBtu.
“The U.S. natural gas market has found itself in an awkward position to potentially enter the winter withdrawal season with the lowest storage level since 2018,” JP Morgan said in a note released last month by the magazine.
JP Morgan sees fourth-quarter prices averaging $ 3.80 / MMBtu, a significant update compared to the previous forecast of $ 3.10 / MMBtu.
Natural gas inventories are below average
The EIA expects the Henry Hub spot price to average $ 3.71 / MMBtu in the third quarter and $ 3.42 / MMBtu throughout 2021, before declining to an average of $ 3.08 / MMBtu next year, amid rising domestic production.
Prices would relax this month and next if mild weather forecasts materialize, but with the heating season in November, natural gas prices could rise again, given that inventories will end the injection season at end of October at 3.6 Tcf, or 4 percent below the five-year average, according to EIA estimates.
“Above-average removal of natural gas from storage during the 2020-2021 winter heating season and below-average injections into storage this summer contributed to our forecast of natural gas inventories for below average, along with relatively flat dry natural gas production and high natural gas exports, ”the EIA said dit last month.
Some analysts do not rule out the price of natural gas of $ 5 / MMBtu.
From a technical analysis perspective, “You still see the potential for an execution of $ 4,742-4,818-4,836, $ 5,000, even $ 5,354-5,410-5,517-5,600 if the maximum of 4,526 can be breached $ before support breaks down, ”ICAP technical analysis analyst Brian LaRose said Natural gas intelligence.
By Tsvetana Paraskova for Oilprice.com
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