US EIA slashes Q1 Henry Hub spot gas price forecast by $1.86, citing weather

The US Energy Information Administration Feb. 7 slashed by $1.86 to $3.13/MMBtu its forecast for Henry Hub natural gas spot prices in the first quarter of 2023, after unseasonably warm weather in January greatly reduced gas demand.

"Temperatures across the United States in January were the mildest since 2006, which reduced consumption of natural gas for space heating and significantly changed our forecast for natural gas markets in the coming months," EIA said in its Short-Term Energy Outlook.

EIA cut its price expectations for all four quarters of 2023. The agency decreased its Q2 Henry Hub gas spot price forecast by $1.48 from the previous month's estimate to $3.27/MMBtu. The agency cut its Q3 outlook by $1.38 to $3.47/MMBtu and it reduced its Q4 estimate by $1.23 to $3.76/MMBtu.

The agency projected Henry Hub gas prices would average $3.40/MMBtu for full-year 2023 and $4.04/MMBtu in 2024, down from the previous month's estimates of $4.90/MMBtu in 2023 and $4.80/MMBtu in 2024.

EIA's 2023 Henry Hub price outlook is down almost 50% from 2022 average prices of $6.42/MMBtu, the STEO said.

Risk of volatility remains

But gas prices remain very volatile, leaving the door open for price spikes, the agency said.

The agency expects close-to-normal weather the rest of Q1, but lower-than-expected temperatures could still support prices, the outlook said.

"Extreme weather events and production freeze-offs could still potentially cause price spikes at both the Henry Hub and in regional markets, but that potential diminishes as spring approaches, particularly now that inventories have moved back above the five-year (2018-2022) average," EIA said.

The Freeport LNG facility is expected to come back online in Q1 and will likely add more than 2 Bcf/d of gas demand to the US market once fully operational, EIA noted. LNG exports are expected to in increase 11%, or 1.2 Bcf/d, on an annual basis in 2023 compared with 2022, EIA said.

Lower gas demand

The agency lowered by 0.98 Bcf/d to 108.6 Bcf/d its gas marketed production estimate for Q1, but increased its Q2 production forecast by 0.13 Bcf/d to 108.73 Bcf/d.

EIA lowered its gas consumption estimate by 1.32 Bcf/d to 100.88 Bcf/d for Q1, but the agency increased its forecast by 0.40 Bcf/d to 75.06 Bcf/d for Q2.

"We expect less demand for natural gas than last year for most of 2023 due to decreased demand in the electric power sector as more renewable electric generation sources come online throughout the year and due to decreased demand in the industrial sector as a result of an expected drop in manufacturing activity," EIA said.

Growth of renewables

Electricity produced from renewables is expected to rise from 22% of total generation in 2022 to 24% in 2023 and 26% in 2024, EIA said. "The gains in the share of renewable energy generation will be driven by about 63 GW of utility scale solar generating capacity that developers have scheduled to enter service by the end of 2024 and about 13 GW of wind capacity that will come online during the same two years," the outlook said.

New renewables are expected to reduce the output from fossil-fired plants, EIA said. Coal's share of the US generation mix falls from 20% in 2022 to 17% in 2024, while the share from gas decreases from 39% in 2022 to 37% in 2024, the outlook said.

As more renewables come online, fuel cost will determine the amount of gas-fired generation in the mix. "After lowering our February forecast for near-term natural gas prices, the forecast share of natural gas generation for 2023 is now 39%, up from a forecast 2023 share of 38% in the previous STEO," EIA said.

EIA forecasts a 16% reduction in coal consumption by the electric power sector in 2023 and flat consumption in 2024, the outlook said. While lower gas prices and increased renewable generation play a role, the decline in power sector coal consumption largely reflects almost 9.6 GW of coal fired capacity retirements in 2023, and another 2.8 GW of retirements in 2024, EIA said.