RJ Update on U.S. Natural Gas Market - Oct 12

[dan_s]

Raymond James Energy Stat: We Still See Plenty of Upside to 2021 U.S. Natural Gas Prices – Is Sentiment Shifting?
October 12, 2020

Given the relative resilience of natural gas demand during the pandemic, the commodity has been more topical throughout 2020 than in years past. Interest has ramped up further in recent weeks on a slew of bullish tailwinds – stronger U.S. LNG export economics, restart of the Cameron LNG terminal (briefly), hurricane-related Gulf of Mexico shut-ins (Laura and Delta), and a handful of Appalachian natural gas shut-ins. Winter 2020-21 natural gas prices are now comfortably above the key psychological threshold of $3/MMbtu. This near-term positivity had lent credibility to the broader theme – and we continue to see meaningful upside to the U.S. natural gas price strip, with prices even likely exiting 2021 around $4. Building off of last week’s U.S. supply/demand and crude oil price deck update, we’re also refreshing our views towards the U.S. natural gas market.

Today’s Stat addresses: 1) frequently asked modeling questions – namely, U.S. natural gas production and export outlooks; 2) the role of fuel switching between coal and natural gas; 3) our U.S. natural gas price deck (and sensitivity to oil prices); and 4) stocks to play the “natural gas” theme (with the most direct impact on U.S E&Ps).

In short, we reiterate our view of a fundamental disconnect between current oil and gas futures strip prices. Commodity prices (oil and gas) MUST move much higher than the current strip to help balance the market next year. All things considered, we reiterate our out-of-consensus outlook for U.S. natural gas prices of ~$3.50 in 2021, more than $0.50 (or around ~20%) above the strip.

"We remain convinced that current oil/gas strip pricing would drive a massive domestic gas supply decline and leave us dramatically short natural gas in 2021. As a result, we're reiterating our Street high 2021 price forecast for Henry Hub ($3.50), with just a moderate normalization in economic activity. While weather can always be a wildcard, even with a fairly conservative demand rebound, there should be considerable upside to U.S. natural gas prices in 2021."

Send me an email if you'd like to read the full RJ report: dmsteffens@comcast.net