American Oil and Gas Reporter - October 2020 - 84

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Natural Gas Market

Report Forecasts Strong Winter Prices
NEW YORK-A new report from Morgan Stanley Research projects significantly
higher average U.S. natural gas pricing
in the months ahead and charts a path for
Henry Hub spot prices to potentially top
$5 per MMBtu during the upcoming winter heating season.
"Record production declines combined
with rebounding demand, led by a recovery
in liquefied natural gas exports, could
create the tightest gas market of the past
decade," the report declares. "2021 Henry
Hub prices have rallied 10% in the third
quarter on tighter inventories, although
we see further upside from here."
In fact, Morgan Stanley says, Lower48 gas storage could see stronger demand
pull this winter than during the recordsetting "polar vortex" winter of 2013-14,
when some 3 trillion cubic feet of gas
was withdrawn from inventory.
Falling production from the sharp reductions in exploration, drilling and production spending in 2020, along with a
continuing recovery on the demand side,
are setting up a scenario in which "winter

storage draws potentially eclipse those of
the 2013-14 polar vortex, and with a growing
shortfall through the 2021 summer months."
For perspective, data from the U.S.
Energy Information Administration shows
that the 2013-14 winter heating season
began with a robust 3.8 trillion cubic feet
of working gas inventory (on par with
storage heading into this winter, which
stood at 3.8 Tcf in mid-October), but average consumption of 91 billion cubic feet
a day-including three consecutive months
with 10-year record storage withdrawals-
reduced inventories to below 1 Tcf by the
end of March for the first time since 2003.
Henry Hub spot prices soared as high as
$8.00/MMBtu and averaged more than
$4.00/MMBtu from November to March.
Materially Higher Prices
Looking at market dynamics heading
into winter 2020-21, Morgan Stanley forecasts Henry Hub prices reaching as high
as $5/MMBtu with cold weather and fullyear 2021 prices averaging $3.25/MMBtu.
"To address the impending supply-demand

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imbalance, we see the need for materially
higher 2021 prices to incentivize muchneeded investment in additional supply
and gas-to-coal switching," the report
argues. "We are updating our gas balance
and increasing our Henry Hub forecast for
2021 from $3.05 to $3.25/MMBtu, implying
13% upside from the current strip of $2.87."
Total U.S. gas production is set to post
a record 6 Bcf/d decline this year, according
to the analysis. Noting that growth in "free"
gas from oil production (associated gas) in
onshore unconventional tight oil plays has
been a key overhang for Henry Hub prices
in recent years, Morgan Stanley points out
that operators have slashed 2020 capital
spending by roughly 50% below their 2019
budgets in response to low oil prices.
"We expect associated gas production
to fall by 3 Bcf/day-4 Bcf/day exit-toexit in 2020," the reports states, noting
that associated gas production declines
could continue into 2021 if West Texas
Intermediate prices remain at or below
$40/barrel, which is the price Morgan
Stanley estimates is needed to hold U.S.

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