The world's demand for natural gas is being impacted by the Covid-19 pandemic, and although it will not be curtailed to the same extent as oil, Rystad Energy estimates international gas prices will reach lower averages than previously expected in 2020. Prices had already been low due to an abundance of liquefied natural gas (LNG) in the market, and it will take years before the virus' effect fully dissipates. Prices in Europe (TTF) for 2020 are now forecasted at $3.2 per million British thermal unit (MMBtu), a drop of $0.62 per MMBtu from our February forecast. Similarly, our price forecast for Asian Spot prices has been revised down to $3.80 per MMBtu. The lower forecast is based on the weaker demand seen globally throughout the year as a result of the lower commercial and industrial activity, which will exacerbate the looseness in the market. Prices in 2021 and 2022 have also been revised down on lower economic growth and ample LNG supplies. Given the recent drop in oil prices and Rystad Energy's downward revision in the oil price forecast, our oil-indexed price has also been revised down. Our new oil-indexed price forecast for 2020 is $7.45 per MMBtu (-4%). Given the six-month lag in oil-indexation in most contracts, the oil-indexed price is expected to reach the bottom in 2021 at a level of $5.68 per MMBtu, which is $1.05 per MMBtu below our previous forecast (-16%). We also see US Henry Hub gas prices remaining below $2.5 per MMBtu for a protracted period, averaging at $1.94 per MMBtu in 2020 and at $2.43 per MMBtu next year. Rystad Energy expects global market fundamentals will remain loose through 2022 before prices tighten significantly as LNG demand growth outpaces liquefaction capacity due to more delays in project sanctioning. Rystad Energy forecasts a tight LNG balance in 2024 and 2025, and along with it, a price spike. Following this period, we see downside risk for prices for 2026 and 2027 driven by potential overinvestment in 2019 as new supplies begin coming onto the market. However, the downside in prices during this period is more limited than our previous estimate as the lower number of liquefaction projects moving ahead will help keep a better market balance. Much of the demand losses this year come from limited appetite for LNG, with buyers scaling down orders amid reduced industrial and commercial activity and oversupply, as low prices sometimes make shipping uneconomical. As a result of the lower demand and the low prices, exporters have had to adjust their LNG production, and the US is among the countries that will see the biggest impact on LNG exports. The feedgas volume flowing into liquefaction plants on the US Gulf Coast has slowed during the last two months, with some redirected to domestic consumption instead, boosting coal-to-gas switching in the power sector. Feedgas reached a peak of 9,502 million cubic feet per day (MMcfd), or about 269 million cubic meters per day (MMcmd) on Jan. 31 and has been on a declining trend since, averaging at 7,900 million cubic feet (224 MMcmd) in March. Feedgas into Sabine Pass LNG has dropped from 4,227 MMcfd (120 MMcmd) on Jan. 31 to as low as 1,743 MMcfd (49 MMcmd) on March 17. "While LNG exports from the US have dropped, demand from the power sector continued to increase in March, boosted by low gas prices. US gas demand from the power sector has recently reached close to 32 billion cubic feet per day (Bcfd), or a 30% increase year-on-year. "However, as the epicenter of Covid-19 moves from Europe to the US, we could see a drop in gas demand from power and other sectors, adding more downward pressure for Henry Hub prices," said Rystad Energy's head of gas and power markets Carlos Torres-Diaz. On the production side, in the US we expect gross natural gas production to drop from 116 Bcfd in the fourth quarter of 2019 to about 108 to 109 Bcfd in the same period this year. We estimate that in a $30 WTI oil price scenario, Permian dry gas production might decline by more than 400 MMcfd, even before yearend, and may fall by another 1 Bcfd over 2021 to 2022, if oil prices do not improve. While this pace of decline may not sound significant, it is a big difference compared to the original expectation of 4 Bcfd growth over 2020 to 2022. The Permian Highway and Whistler pipelines will most likely still come online and achieve adequate utilization rates, but the utilization of some legacy pipelines, and the need for future projects, is now at serious risk. The lower gas production from associated wells could help balance the market and push Henry Hub prices back to $2 per MMBtu towards the end of the year. — Rystad Energy
