Softer US industrial demand and weaker LNG exports in 2020 due to COVID-19 should be partially offset by less associated gas production, according to estimates from Simmons Energy. However, increased US power-generation year-over-year (via market share gains) will be necessary to avoid exceeding 4.0 tcf of gas in storage at Nov. 1.
Beyond these near-term headwinds, however, the medium-term outlook remains highly favorable given declining production in 2021 (-4.3 bcf/d year-over-year), Simmons Energy said. With declining production, Simmons Energy believes materially higher gas prices will be needed in order to weaken gas demand and maintain adequate natural gas storage entering the 2021 winter.
“Overall, 2020 continues to have considerable challenges which shouldn’t be underestimated, but we believe step-shift higher natural gas prices are necessary to build enough gas in storage during 2021.
“We expect US oil production to materially decline relative to its recent peak as a result of imploding demand as well as limited storage which should drive significantly less associated gas production. Further, the horizontal gas rig count continues to decline to levels well below maintenance primarily as a result of a challenged 2020 commodity environment. While we believe higher gas prices next year will spur increased activity, we don’t expect significant rig adds until late 2020 or early 2021 which would limit the production response next year.”
Simmons Energy sees the potential for 2020 fourth quarter and 2021 dry gas production estimates of 88.9 bcf/d (-7.0 bcf/d y-o-y) and 87.3 bcf/d (-4.3 bcf/d y-o-y), respectively.
LNG exports
As a result of COVID-19, the threat of lower US LNG exports has lingered over the market all year. With exceptionally thin US/Euro spreads near-term as well as recent Bloomberg/IHS articles suggesting that European buyers have rejected 20 cargoes in June, there is heightened risk that LNG feedgas will be weak during summer months.
According to the most recent EIA data, the US exported almost 4.0 bcf/d of gas to Europe in January but visibility toward the potential impact to LNG demand this summer is uncertain as LNG operators could attempt to sell some surplus volumes elsewhere, Simmons Energy said.
For now, Simmons assumes a 2 bcf/d impact during summer months relative to the recent February peak and looks toward Cheniere’s first quarter earnings call for potential commentary on summer feedgas.
Looking toward 2021, Simmons Energy expects flattish LNG exports y-o-y as Henry Hub prices will need to rise to high enough to make US LNG cargoes less competitive globally, keeping US gas storage greater than 3.0 tcf entering the 2021 winter.
