Good reason to be bullish on US natural gas prices
Posted: Mon Jan 03, 2022 4:03 pm
Notes below are from UBS Investment Research Team January 3, 2022
2022 energy outlook: Positive outlook for crude
and US natural gas
Natural gas prices to rise in the US, fall in rest of the
world
We need to make a distinction between natural gas prices
in the US, and in Europe and Asia. Prices in the latter
two regions are trading north of USD 130per barrel oil
equivalent (boe), while US prices are around USD 21/
boe. With inventories in Europe and Asia below long-term
averages, we expect natural gas prices to stay above levels
seen in recent years in those two regions. In contrast, US
natural gas inventories are currently close to the five-year
average, but we expect some tightness to emerge in 2022
despite solid production growth driven by higher power
gas demand and rising exports. New liquefied natural gas
(LNG) export facilities in the US should help to ease the
extreme tightness in Asia and Europe once milder spring
temperatures emerge, while supporting US prices.
US natural gas production has risen rapidly in recent months,
with the EIA estimating total dry gas production at 96 billion
cubic feet per day in November (+4.4% y/y), supported
by growth in multiple shale basins such as Appalachia,
Haynesville and the Permian. That said, lower prices will
likely support US natural gas power burn at the expense
of coal. US coal prices stand at a multi-year high amid
stagnating domestic coal production, high exports and low
inventories. Also, we expect price support to come from
ongoing exports of US LNG. Thanks to new LNG liquefaction
units—Sabine Pass sixth production train (capacity of 0.76
billion cubic feet per day) and Calcasieu Pass LNG export
facility (capacity of 1.6 billion cubic feet per day)—and
higher capacity at existing facilities due to upgrades (0.70
billion cubic feet per day), US LNG export capacity will rise
to 13.9 billion cubic feet per day by end-2022, according to
the EIA. This sets the US up to overtake Australia and Qatar
for the title of world’s largest LNG capacity. Pipeline exports
to Mexico are also expected to increase further in 2022,
benefiting from high demand amid an expanded natural gas
pipeline infrastructure in the country.
Given our expected demand and supply trends, we expect
US natural gas inventories to end the withdrawal season
(end-March) at around 1.65 trillion cubic feet (5-year
average 1.8 trillion cubic feet) and the injection season (end
October) at 3.55trillion cubic feet (5-year average 3.7 trillion
cubic feet). Supported by demand from abroad, we expect
US natural prices to trade at around USD 4.20/mmbtu in
summer 2022, compared to the futures curve trading at
around USD 3.50–3.60/mmbtu at present. Hence, we think
risk-seeking investors can find some value in being long
3Q22 US natural gas contracts.
2022 energy outlook: Positive outlook for crude
and US natural gas
Natural gas prices to rise in the US, fall in rest of the
world
We need to make a distinction between natural gas prices
in the US, and in Europe and Asia. Prices in the latter
two regions are trading north of USD 130per barrel oil
equivalent (boe), while US prices are around USD 21/
boe. With inventories in Europe and Asia below long-term
averages, we expect natural gas prices to stay above levels
seen in recent years in those two regions. In contrast, US
natural gas inventories are currently close to the five-year
average, but we expect some tightness to emerge in 2022
despite solid production growth driven by higher power
gas demand and rising exports. New liquefied natural gas
(LNG) export facilities in the US should help to ease the
extreme tightness in Asia and Europe once milder spring
temperatures emerge, while supporting US prices.
US natural gas production has risen rapidly in recent months,
with the EIA estimating total dry gas production at 96 billion
cubic feet per day in November (+4.4% y/y), supported
by growth in multiple shale basins such as Appalachia,
Haynesville and the Permian. That said, lower prices will
likely support US natural gas power burn at the expense
of coal. US coal prices stand at a multi-year high amid
stagnating domestic coal production, high exports and low
inventories. Also, we expect price support to come from
ongoing exports of US LNG. Thanks to new LNG liquefaction
units—Sabine Pass sixth production train (capacity of 0.76
billion cubic feet per day) and Calcasieu Pass LNG export
facility (capacity of 1.6 billion cubic feet per day)—and
higher capacity at existing facilities due to upgrades (0.70
billion cubic feet per day), US LNG export capacity will rise
to 13.9 billion cubic feet per day by end-2022, according to
the EIA. This sets the US up to overtake Australia and Qatar
for the title of world’s largest LNG capacity. Pipeline exports
to Mexico are also expected to increase further in 2022,
benefiting from high demand amid an expanded natural gas
pipeline infrastructure in the country.
Given our expected demand and supply trends, we expect
US natural gas inventories to end the withdrawal season
(end-March) at around 1.65 trillion cubic feet (5-year
average 1.8 trillion cubic feet) and the injection season (end
October) at 3.55trillion cubic feet (5-year average 3.7 trillion
cubic feet). Supported by demand from abroad, we expect
US natural prices to trade at around USD 4.20/mmbtu in
summer 2022, compared to the futures curve trading at
around USD 3.50–3.60/mmbtu at present. Hence, we think
risk-seeking investors can find some value in being long
3Q22 US natural gas contracts.