A continuing natural gas glut will drive the 2020 average price at the Henry Hub down (in real terms) to a level unseen in decades, according to a new report from analytics/information firm 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 per million British thermal units (Mmbtu) for the year, IHS Markit said.
That’s the lowest average price in real terms since the 1970s. In nominal terms, the last time prices fell below $2 was 1995, Kallanish Energy reports.
Prices fall despite ‘robust’ demand
Prices are expected to fall despite robust domestic demand — which has increased by 14 billion cubic feet per day (Bcf/d) in annual average demand since 2017 — 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.
It still will not be enough to absorb production that’s grown by more than 14 Bcf/d since January 2018. IHS Markit expects production to average more than 90 Bcf/d in 2019 and 2020.
“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.”
Production surge from the Permian
That next surge of production is expected to come from the Permian Basin in West Texas/southeast New Mexico. Growth from the region will more than compensate for declines elsewhere — sustaining the oversupply and the downward pressure on prices that it creates, IHS Markit believes.
“Nearly all the growth in U.S. natural gas demand over the next few years will come from LNG exported to other countries. The added supply from the Permian will match, if not exceed, those volumes,” Andrus added.