Crude Oil Price War Has Another Victim: Natural Gas

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)-- Natural gas is another victim of the current volatility in crude oil prices. According to a new report from oil and gas analytics firm Enverus (Austin, Texas), West Texas Intermediate (WTI) crude oil prices below $35 per barrel will temporarily remove nearly all associated gas from the nation's gas supply. The loss of associated gas, produced when drilling for oil, could reach 5.1 billion cubic feet per day (Bcf/d). In addition, dry-gas production this year could shrink by at least 6 Bcf/d compared with 2019, the firm said in a report, "The Dark Side of the Boom," released April 7.

WTI was trading at about $23 per barrel last Thursday, well under the price assumptions in the Enverus report.

Some of this predicted gas supply shortfall is expected to be partly offset by decreased demand for gas as long as the non-essential businesses in the U.S. and around the world remain temporarily closed. However, Enverus predicts a gas supply crunch for the coming winter that could more than double U.S. gas prices, to between $4.00 and $4.50 per million British thermal units (MMBtu) compared with current cash spot prices at Henry Hub of approximately $1.75 per MMBtu.

Longer term, if gas prices remain at $2 per MMBtu and WTI prices stay at $25 per barrel, Enverus Vice President of Strategic Analytics Bernadette Johnson predicted dry-gas production could fall up to 34 Bcf/d by late 2025. Even if WTI prices average $45 per barrel, she sees dry-gas production falling off 14 Bcf/d.

"The cure for low prices is low prices," Johnson said in the report. "The oversupplied oil market will keep crude prices low, depressing natural gas production. This will cause the gas market to go from being long during the summer months to being very short by the winter 2020-21. A sharp increase in natural gas prices is needed to incentivize natural gas production growth from gas directed plays, namely Marcellus, Utica and Haynesville."

The firm forecasts gas prices will exceed $4/MMBtu and could reach $4.50/MMBtu as early as the coming winter. Longer term, natural gas prices are expected to average $2.80/MMBtu; this level allows gas production growth to meet expected demand gains.

Click on the image at right to see Enverus' projection for a decline in U.S. gas demand at various oil price points.

Recognizing that the Oil & Gas Industry is facing unprecedented volatility and uncertainty, Enverus tried to predict future U.S. gas demand using gas-demand consumption reductions from the Great Recession of 2008-2009.

In 2020, gas demand from customers in the commercial, industrial, electric power and residential segments is predicted to fall to about 74.1 Bcf/d, down from approximately 77.3 Bcf/d in 2019. Gas demand in 2021 is expected to increase slightly to about 74.3 Bcf/d in 2021, 77.8 Bcf/d in 2022 and 80.5 Bcf/d in 2025.

Click on the image at right to see Enverus' base-case projection of gad demand, by sector, for 2020-2025.

There is a high level of gas in storage, and that is expected to help cushion against any supply shortfall this year, the Austin-based firm said. But by November 1, the traditional start of the winter withdrawal season, inventories are expected to decline to the degree that they would provide added support for gas prices.

"Project spending for the North American Oil & Gas Production and Pipelines industries is expected to be particularly challenged this year," Mike Bergen, Industrial Info Resources' executive vice president told about 1,000 listeners on a webcast April 3. "Through the first quarter, we were tracking approximately $70 billion of project fallout for the Oil & Gas Production industry this year compared to about $16 billion for the comparable year-earlier quarter. On a dollar basis, the North American Oil & Gas Production industry has the highest amount of project fallout."

For related information, see April 9, 2020, article - Industrial Info Assesses COVID-19 Impact on Global Project Spending .

In its April Short-Term Energy Outlook, released April 8, the U.S. Energy Information Administration (EIA) predicted U.S. dry-gas production would average about 91.7 Bcf/d in 2020, down slightly from last year's record production of 92.2 Bcf/d. Monthly dry-gas production this year is expected to swing from an estimated 94.4 Bcf/d in March to about 87.5 Bcf/d in December. Production declines this year will be most pronounced in the Appalachian and Permian regions. In the Appalachian region, low natural gas prices are discouraging producers from engaging in natural gas-directed drilling, and in the Permian region, low oil prices reduce associated gas output from oil-directed wells. The EIA said it expected 2021 dry-natural gas production to fall to an average of 87.5 Bcf/d.

Exports of liquefied natural gas (LNG) are doing little to support domestic gas prices, as many other nations are facing weaker demand for LNG brought about by economic contractions.

The STEO forecast exports of liquefied natural gas (LNG) from the nation's six export plants on the Gulf Coast and on the Eastern Seaboard will average about 6.6 billion cubic feet per day in the second quarter of 2020 before declining in the third quarter.

In the third quarter, the agency projected, LNG exports will fall to an average of approximately 6.0 Bcf per day, a 0.3 Bcf/d decline from EIA's projection in the prior month's STEO.

The STEO predicted Henry Hub cash prices would average $2.19 per thousand cubic feet (Mcf) this year, down from $2.66 per Mcf in 2019 and $3.27 in 2018. But the statistical and analytic branch of the U.S. Department of Energy (DoE) saw a more modest price rebound for 2021, when it predicted Henry Hub cash spot prices would average $3.09 per Mcf. The agency noted the just-concluded winter was milder than normal, which helped to hold down consumption.

Click on the image at right to see a natural gas price projection from the EIA.

A lot of media attention has focused on oil company cuts in capital expenditures, dividends and employees, in response to COVID-19's unprecedented destruction of global demand, potentially numbering as high as 30 million barrels per day (BBL/d). This is coupled with the crude oil price war waged by Saudi Arabia and Russia, who have been flooding an oversupplied global market with more crude in order to capture market share from higher-cost producers, including U.S.-based drillers.

For more on how oil companies' have responded to current market conditions, see:

• April 8, 2020, article - ExxonMobil Lops $10 Billion Off Planned 2020 Capex, Targets Permian Basin
• April 6, 2020, article -- Oil Patch Crisis: The Bricks Begin Falling
• March 30, 2020, article - Oil Market: Where is the Bottom?
• March 16, 2020, article - Oil & Gas Producers Slash Capital Outlays, Citing Uncertainties over COVID-19, Crude Oil Price War,
• March 11, 2020, article - Crude Oil Price War Roils Markets, Leads Some Firms to Cut Capex

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.