Just over one year ago, the World Health Organization declared the COVID-19 outbreak a pandemic, changing life as we knew it and wreaking havoc on the oil and gas markets. Earlier this month, BTU Analytics looked at the impact of COVID-19 on oil markets, both in the US and abroad. In today’s Energy Market Insight, BTU Analytics examines the state of the US gas market one year removed from the start of the pandemic.
Primarily driven by shut-ins in oil-driven plays, natural gas production fell sharply in 2020 and struggled to recover as the pandemic took hold. In the summer of 2020, lower 48 natural gas production averaged 90.8 Bcf/d, approximately 3.8 Bcf/d lower than the pre-pandemic levels from March 2020. Demand was similarly impacted with the most acute effects felt by industrial and LNG demand as the global economy began to shut down. Throughout the summer, industrial demand averaged approximately 2 Bcf/d lower compared to March. The effect on LNG was even more pronounced, averaging 2.8 Bcf/d below March levels and peaking at over 5 Bcf/d of demand destruction in July. In aggregate, total demand destruction across LNG and industrial averaged 4.8 Bcf/d through the summer of 2020, 1 Bcf/d higher than lost natural gas production.
Although demand had largely recovered by October, the summer imbalance between supply and demand had a significant impact on storage. 2020 US gas storage topped out at 3.96 Tcf, 226 Bcf higher than in 2019 and the highest end of summer level since 2016. Fears of an impending gas storage glut in 2021 were further exacerbated by an abnormally warm start to the winter, which kept storage at a surplus to the five-year average. However, the winter storm of February 2021 has completely reversed storage expectations driven by the second largest withdrawal from US storage ever recorded. According to the EIA’s most recent storage report this morning, total US storage now sits at 1.78 Tcf, 93 Bcf below the five-year average and 253 Bcf below the same point in 2020.
Despite storage levels painting a bullish picture for gas pricing this summer, the Henry Hub forward curve has given up most of the gains it achieved in the wake of the winter storm. The summer 2021 strip sits at just $2.63/MMBtu, while the balance of 2021 is slightly higher at $2.68/MMBtu. This weakness appears at odds with what should be a tight gas market. While gas supply is likely to see a boost from associated gas production because of strong oil prices, it is also likely to be offset by increased demand, particularly from LNG. Forward spreads to Europe and Asia continue to remain wide enough to support high utilization of US facilities throughout the summer. As summer approaches, the combination of resurgent LNG demand and a stronger need for storage refill could lead to upside for Henry Hub cash prices.
The COVID-19 pandemic led to significant turmoil in the US gas market in 2020. However, just one year later, demand appears to have fully recovered to pre-pandemic levels with production lagging just slightly behind. With storage levels depleted and LNG demand poised to sustain summer strength, Henry Hub pricing has the potential for considerable upside this summer. For BTU Analytics’ forecast for the US gas market and Henry Hub pricing, request a sample of the Henry Hub Outlook.