Natural gas has outperformed oil in 2020, and prices are poised to do something they haven’t done since 2016 on the heels of U.S. production declines and rising exports: finish higher for the year.
The primary catalyst for the fuel’s price gain this year has been U.S. production, says Richard Redash, head of global gas planning at S&P Global Platts. Production plateaued in late 2019 to early 2020 before turning lower, and by the second quarter of this year it saw year-on-year declines, he says.
The collapse in both oil and natural-gas prices into the second quarter accelerated the shift from an uptrend to a downtrend in production, Redash says. That had a lot to do with the pandemic, given the economic restrictions put in place to prevent the virus’ spread, he says.
Somewhat independent of the pandemic, however, was the “concurrent oil-price war” between Saudi Arabia and Russia, says Redash. In early March, the Organization of the Petroleum Exporting Countries and its allies failed to agree to additional crude output cuts. Instead, the Saudis and Russians vowed to lift production.
That price war, combined with pandemic-related lower fuel demand, led to a collapse in oil prices and U.S. oil drilling, says Redash, which means associated domestic natural-gas production, a byproduct of oil output, also fell. The natural-gas output declines are likely to continue “well into 2021,” helping to tighten supplies.
Front-month natural-gas futures have climbed by nearly 12% year to date to settle at $2.442 per million British thermal units on Dec. 9. That’s a far cry from the year’s low of $1.482 seen in June, the lowest settlement since August 1995. That followed a plunge in U.S. benchmark crude futures to negative prices in April.
Natural gas isn’t likely to see prices return to that 25-year low anytime soon, says Sanjeeban Sarkar, commodities editor at The Economist Intelligence Unit, given that liquified natural-gas consumption is expected to jump in 2021 as natural gas is “adopted further as a cleaner fuel compared to coal.” On the whole, EIU expects a 45% rise in 2021 Henry Hub natural-gas prices, he says. Henry Hub refers to the main delivery location for New York Mercantile Exchange natural-gas futures contracts.
For November, the Energy Information Administration estimated U.S. LNG exports at 9.4 billion cubic feet a day, the most for any month on record. It expects exports to average 8.5 bcf a day in 2021, up 30% from this year’s average.
Still, natural-gas prices suffered a 14% drop in November. James Roemer, Weather Wealth newsletter author at commodity-trading advisor Bestweatherinc.com, believes that prices could fall to $2 this winter “due to excess supplies and mostly warm weather.”
This year’s Atlantic hurricane season, meanwhile, didn’t provide a lasting boost to gas prices despite a record number of 30 named storms—in fact, it may have contributed to price losses. Historically, an active hurricane season is bullish for natural-gas prices because of production-disruption risks, says Redash. Instead, there’s concern over “demand destruction vulnerability” from storm-related power losses.
The U.S. also has more than 10 billion cubic feet a day in LNG export capacity and storms may disrupt shipping, forcing LNG terminals to temporarily close and “backing up a lot of supply into the market,” Redash says. “So hurricanes and tropical storms have become more bearish for prices.”
Looking ahead, if there’s a mild winter, that would damp the upside for the heating fuel, limiting the ability to sustain a $3-plus price, says Redash, while a somewhat normal winter would see 2021 prices in the range of $3 to $3.25.