An oversupply of natural gas will drive the 2020 average price at the Henry Hub down to a level not seen in decades, according to new report from IHS Markit. The price of natural gas will drop to $2/MMBtu.
The drop in natural gas prices is coming from an oversupply. The oversupply has occurred even though there has been robust domestic demand growth and even exports. The U.S. is expected to export an additional 3 Bcf/d of liquefied natural gas (LNG) in 2020 but even that is not enough to keep up with supply.
Even with LNG exports increasing, it will not be enough to absorb production that has grown by more than 14 Bcf/d since January 2018. IHS Markit expects production to average more than 90 billion cubic feet per day 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.”
That next surge of production is expected to come from the Permian basin in West Texas. 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 said.
“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.
Let’s make sure that we avoid natural gas stocks. There is a temptation to short natural gas but that is dangerous too. President Trump will likely try to find new buyers for our natural gas and if such an external event happens, it could completely change IHS Markit’s forecast for the price of natural gas.
Disclosure: We do not hold any position in any natural gas market.