American Oil and Gas Reporter - May 2020 - 38

SpecialReport: Natural Gas Outlook
is possible that there will be a change of administration in the
midst of all this disruption, with the new administration having a
very different attitude toward natural gas development.
Looking two or three years out, we are going to need a lot
more drilling and development in gas shale plays. If there is a
change in administration, there are likely to be continued
difficulties in adding new pipeline infrastructure, notwithstanding
the need for more supply. That could lead to steeper price
increases than the industry wants to see, including regional
price shocks.
Of course, there would be an equivalent impact on the oil
side, with downside or upside price risk depending on how one
wants to look at it. One downside risk is the likelihood that a
new administration would lift U.S. sanctions on Iran. Should
that occur in a severely oversupplied market, it would not only
be terrible news for oil producers, but suggest that it could take
much longer for tight oil (and associated gas) production to
rebound to pre-coronavirus levels.

Q: You have identified U.S. LNG exports as a determining
factor in the near-term outlook for natural gas. LNG
pricing was weak even before the first case of COVID-19
in China. What is your outlook for U.S. export volumes?
Looking globally, to what degree does the historical
collapse in oil prices make crude a more formidable
head-to-head competitor to LNG?
WEISSMAN: LNG exports are absolutely critical to the
future prospects of natural gas producers in the United States.
But again, we need to make a sharp differentiation between the
short term through mid-fall, and the longer term after mid-fall.
As noted, between now and November, we see considerable
downside risk. It is as clear as it could possibly be that there is
a near-term glut of LNG supply. LNG exports will be reasonably
healthy in May because of the timing and the notification requirements under various contracts, but at a minimum, I
anticipate several Bcf/d of lost LNG demand and much more
FIGURE 1
Projected Shallow and Steep Decline Scenarios
Of U.S. Associated Dry Natural Gas Production
(April 2020-March 2021)
0.0
-2.0

Bcf

-4.0
-6.0
-8.0
-10.0
Shallow Decline Scenario

Steep Decline Scenario

-12.0
Apr-20

Jun-20

Aug-20

Oct-20

Dec-20

Source: EBW Analytics

38 THE AMERICAN OIL & GAS REPORTER

Feb-21

supply than the world market can absorb from June through at
least September.
There are two layers of issues. One is the supply glut that already existed before the COVID-19 shutdown, which has been
made worse by the huge loss of demand during the past two
months. The second is the impact of low oil prices on the ability
of U.S. LNG suppliers to compete with suppliers around the
world, including those in Australia, for example, where LNG
prices are oil-based.
I am also concerned about the potential for direct oil-on-gas
competition. The world is going to be looking desperately
during the next few months for ways to use all the excess oil. In
late April, West Texas Intermediate futures prices for June were
trading at a level that made oil less expensive than LNG on a
delivered basis. If very low oil pricing continues, it could
change global market dynamics and seriously eat into LNG demand. It is not sustainable and I hope it doesn't happen, but
there is potential for a demand crisis in late summer with steep
declines in U.S. LNG exports.
With natural gas, however, there are strict physical limits
on how much can be stored. This may lead to any near-term
glut-domestic or abroad-getting cleared much faster than in
the oil market. The key for global LNG demand remains gas
used for space-heating purposes, so once we get to winter, the
utilization factor for U.S. LNG liquefaction plants should
rebound strongly.

Q: To summarize, you expect U.S. natural gas storage
to be brimming and global LNG markets to be oversupplied
for the next several months, but with a quick turnabout
that sees very low summertime prices rallying to above
$3/Mcf as storage is drawn down come early winter. What
does that mean for producer hedging strategies?
WEISSMAN: I would again break it down into two phases.
While there is a fair amount of hedging locked in for the rest of
2020, the downside risks during the next few months are
extreme, and come at a time when the financial positions of
many producers are precarious. As oil storage runs out and production is cut sharply, we may see a jump in natural gas prices.
I would encourage producers to not miss this opportunity to
hedge as much as possible of their remaining unhedged production
through this fall. The downside price risk is substantial and the
name of the game is going to be to conserve capital to make it
to next winter.
Once we get to November and the start of the heating
season, the downside risk will shift to upside potential. We
have no way of knowing what weather for the upcoming
winter holds, but the difference between a very mild and a
very cold winter is on the order of 1.8 trillion cubic feet.
Therefore, even though we predict higher prices in 2021, we
recommend that producers still hedge a significant portion of
their production through the first and second quarters since
prices could still decline if winter weather is as mild as the
winter of 2019-20.
Along with the usual weather risk factor, the other huge
question is when the spread of the coronavirus will be under

American Oil and Gas Reporter - May 2020

Table of Contents for the Digital Edition of American Oil and Gas Reporter - May 2020