If history repeats itself, the natural gas price recovery that took place after a 2019-2020 downturn could offer some insight into what may drive a recovery from a similar price routing in the 2023-2024 period, an NGI analysis shows.
The years 2019 and 2020 saw a yearlong stretch in which prices sank below $3.500/MMBtu all the way to a low of $1.330 in the fall of 2020. Similar to today, unsupportive weather and rampant production growth played a major role in the decline. A far-reaching global event that no one saw coming exacerbated the price move lower.
The gas market’s recovery kicked off in 2021 when Winter Storm Uri sent prices skyrocketing as demand soared and production plummeted. Although prices soon fell from record highs, the lasting impacts from that storm, combined with strong summer demand and rising LNG exports, fueled the recovery for U.S. benchmark Henry Hub, which went on to trade in an average range from $2.30s to the $6.20s.
More recently, Henry Hub gas prices have experienced a similar decline, ranging from a high of $4.25 to a low of $1.68 over the past year, according to NGI’s historical daily price data. At the heart of the price decline is robust production that rose throughout the past year in anticipation of increasing liquefied natural gas export capacity. That hasn’t quite panned out as anticipated, and combined with a warm start to the winter, prices continue to languish.
January’s Winter Storm Heather resulted in a brief price spike – Henry Hub spot prices shot up above $13 – and there is the potential for another blast of frigid air to hit the Lower 48 in late February. Could Mother Nature kick off a sustained recovery for prices this year as she has in the past?
Winter Is Key
There’s no doubt that winter rules the natural gas market.
Natural gas prices during the winter of 2019-2020 reflected what was at the time the warmest on record for the contiguous United States, according to National Oceanic and Atmospheric Administration (NOAA) data going back to 1895. That December and January, the average national temperature was 35.9 degrees. The average topped the 35.8-degree record that had been set in the same months in 2005 and 2006.
The record low winter temperature averages didn’t hold, however, as new records were set this past December. In fact, NOAA said temperatures were 2.57 degrees above the 20th-century historical average that month.
“Nearly every reporting site over the Lower 48 states experienced temperatures above the historical average for the month,” AccuWeather said.
Without winter weather support, residential and commercial (res/comm) sector demand fell 2% year/year (y/y) in 2023, according to the EIA. This was similar to the milder 2019-2020 winter, when natural gas consumed by the residential sector fell 7% y/y and natural gas consumption in the commercial sector, which includes restaurants, hotels and schools, decreased by 11%.
Of course, natural gas consumption fell even further after the first case of the Covid-19 was reported in the United States in late January 2020.
“The resulting economic fallout decimated oil and gas demand as businesses and schools closed, industries tempered production and other measures were put in place to slow the spread of the virus,” NGI’s Price and Markets Editor Leticia Gonzales said. She added that there were also massive LNG cargo cancellations that resulted from Covid-19 shutdowns around the world that added to the demand-side pressures.
Already weak, gas prices came under even more pressure. Henry Hub natural gas started the December 2019-January 2020 period at a high of $2.395. Without demand support, prices fell into the $1.80s.
Prices in 2023 and so far in 2024 have been in a similar, though slightly higher range, mostly from $2.155 to $3.290, outside of the brief spike during the January storm.
Production Grows
Meanwhile, rampant production growth has been a common theme during both price downturns, at least initially.
Natural gas production increased by a record 10% in 2019 versus 2018, according to EIA. By December 2019, production had reached a monthly record high of 97.0 Bcf/d.
Covid eventually took its toll on supply, however, with output plummeting to an average of 90.9 Bcf/d in 2020, or 2.2 Bcf/d lower y/y, as exploration and production companies slashed budgets.
A similar lack of response to depressed natural gas demand and lower prices unfolded in 2023, with producers ramping up output to a record-high annual average of 102.2 Bcf/d last year.
“Natural gas had the perfect storm of record production at a time when winter decided to take a holiday,” Price Futures Group’s Phil Flynn, senior analyst, told NGI.
As in the 2019-2020 period, the combination of high production and lackluster demand sent natural gas inventories to record high levels early in the titular withdrawal seasons (November-March).
The 2019-2020 heating season began with 178 Bcf more natural gas in storage than the average level of the previous five years. The surplus grew to 285 Bcf by the end of November, but started to narrow in December and January as heating demand bounced. Winter Storm Uri kicked the rapid rate of withdrawals up a notch, creating the first deficit to the five-year average since November 2019, EIA data show.
More recently, the U.S. working gas inventory ended December at 3,476 Bcf, 399 Bcf higher than the five-year average and 533 Bcf higher than 2022. Similar to Uri in 2021, colder weather in January trimmed the surplus as a near-record withdrawal of 326 Bcf was reported by the EIA for the week of Jan. 19. The steep drawdown left inventories at 2,856 Bcf, slashing the surplus to the five-year average to 142 Bcf from 320 Bcf the prior week.
Bouncing Back
Exiting the winter with high inventories, prices could remain low without support from an uptick in weather-related demand in the summer months from June to August. But, “you can be amazed though how fastly the natural gas market can recover,” Flynn said.
Gonzales agreed. After plunging to an average of $1.660 in June 2020, partly because of the massive LNG cargo cancellations, “prices began to strengthen later that year as weather-driven demand led to a resumption in shipments overseas…
“Of course, hurricanes Laura and Delta temporarily derailed those plans, but nevertheless, the demand for U.S. LNG recovered, and by the end of the year, natural gas prices were about $1.00 higher,” Gonzales said.
Looking ahead, with all the unexpected events over the last few years, nothing is certain, Gonzales noted.
“Mother Nature has been known to throw a few curve balls at the market. We saw this earlier this month when Winter Storm Heather drove prices higher (albeit temporarily), but hurricanes also are a big wildcard, especially with most of the LNG export facilities located on the Gulf Coast.”
She added, “Global factors also present a risk as the U.S. has quickly become the world’s largest LNG exporter.”
But, much of that same optimism related to natural gas price support from LNG that was present in 2020 is alive today. LNG is seen driving momentum later this year and for years to come as U.S. export capacity grows with the addition of new projects expected to come online in the next decade.
Though delayed to later this year, the first train from Golden Pass LNG is set to kick off the wave of new LNG projects that include the Corpus Christ Stage 3 expansion, Plaquemines, Port Arthur and the first phase of Rio Grande.
As the projects already approved move ahead, the Biden administration placed a roadblock on other LNG facilities that have yet to receive federal export authorizations. On Friday, the administration paused new federal export authorizations for LNG projects while the U.S. Department of Energy (DOE) reviews policies to determine whether more capacity is in the public interest. At least 17 facilities have pending authorizations at the DOE.
“People produce natural gas on the assumption that we’re gonna be able to export it,” Flynn said. If export terminals aren’t approved, producers would likely have to shut in wells, and “that would definitely peak off natural gas production in the future and probably cause higher prices down the road.”
Yet demand growth is expected from other sectors as well. The EIA expects demand to increase by a combined 1.8 Bcf/d in 2024 from the residential/commercial and electric power sectors as well as in exports via pipeline.
Producers would need to maintain a healthy rate of production to keep up with the strong demand and the EIA expects production growth, albeit at a slower rate in 2024 and 2025. The EIA outlook calls for production growth of 1.5 Bcf/d and 1.3 Bcf/d, respectively.
With a balance between supply and demand, natural gas spot price could average $2.70 in 2024 and rise to an average of about $3.00 in 2025, up from an average of $2.54 in 2023, the EIA said.
