Natural gas prices will rocket higher at the end of 2020 as demand emerges from a trough just as supply declines show up in markets, leaving the United States with too little gas in storage heading into winter 2021, according to a new Goldman Sachs forecast.
The outlook prompted Goldman Sachs to revise its gas price forecast in a March 24 research note, which predicts the gas market will be the first commodity market to balance amid the economic fallout from the COVID-19 pandemic. The revisions are slight at first — Goldman increased its second-quarter forecast just 10 cents to $1.60/MMBtu and left its third-quarter outlook unchanged — but they accelerate in the final months of 2020.
The investment bank now sees NYMEX Henry Hub gas prices averaging $3.50/MMBtu in winter 2020-2021, up from an earlier forecast of $3/MMBtu. The market forces behind the revision will keep gas prices elevated through the summer of 2021, with Henry Hub averaging $3.25/MMBtu, up from Goldman's previous forecast for $2.75/MMBtu.
Goldman's revision is rooted in the two dominant forces in energy commodity markets: the anticipated drop in U.S. oil and related gas production amid a Saudi-led price war, and the decline in economic activity as the COVID-19 outbreak keeps consumers and workers at home.
"The combination of lower U.S. gas production, which we expect to last through at least mid-2021, with a global recession this summer has set the stage for a 'whiplash' in U.S. natural gas markets," Goldman analysts Samantha Dart and Damien Courvalin said in the note.
Goldman expects the deepest drop in gas demand, particularly from industrial customers and power plants, to occur during the second quarter. Summer gas demand will be 2.5 Bcf/d below Goldman's previous forecast, with second-quarter demand down 3.8 Bcf/d alone, reflecting the bank's view that U.S. GDP will contract 3.8% this year.
However, Goldman anticipates the effect of a significant drop in U.S. gas production will lag, intensifying toward the end of the third quarter. That will allow U.S. storage facilities to fill up, with injections hitting record levels during parts of the summer.
The bank forecasts a 700,000 barrel-per-day drop in U.S. oil production this year, leading to a roughly 1.8 Bcf/d decline in gas output, as gas plumbed during oil production falls.
The drop in these associated gas supplies means gas producers in the Appalachian region are less likely to shut in wells to balance the market, Goldman said. However, some producers could still shut in wells in places like the Gulf Coast and the Midwest, where industrial customers account for a large share of demand. If shut-ins accelerate, gas prices could leap above the bank's $1.75/MMBtu third-quarter forecast, the analysts said.
While Goldman sees gas storage levels remaining comfortable at the end of the withdrawal season in March 2021, analysts said the effect of lower oil production on gas volumes will become more visible around that time. An anticipated drop of 1.3 million bbl/d through the third quarter of 2021 pencils out to 5.1 Bcf/d decline in gas output, according to Goldman.
"As we move into 2021, this path of declining oil and gas production, if sustained, will likely result in an exceptionally tight summer 2021, which suggests current forward prices are not sustainable," the analysts said.