Viewpoint: US gas prices may recover slowly in 2020

Natural gas producers in the key US Appalachia production region are cutting back on drilling plans in response to market weakness, but those cuts are likely to have only a muted effect on US prices next year.

Appalachia, home to the Marcellus and Utica shales, is the largest gas producing region in the US by volume, meaning output there can have a meaningful effect on prices nationwide. Appalachia output topped 33.5 Bcf/d (949mn m³/d) in October, more than double the production from the Permian region in Texas, according to the most recent data from the US Energy Information Administration (EIA).

Large independent gas producers, such as Range Resources, have announced plans to curb production growth in 2020 in recent earnings calls. But other producers, like EQT and Cabot Oil & Gas, two of the biggest gas producers in the Marcellus, are planning to keep output unchanged year over year.

The EIA still expects 2020 US output to top this year's levels, and forecasts that Henry Hub spot prices will keep falling.

A glut of natural gas from Appalachia spurred by production efficiency gains contributed to lower prices in 2019, with Henry Hub spot prices averaging $2.52/mmBtu so far this year, compared with an average of $3.12/mmBtu in 2018.

Overall US dry-gas production in 2019 is expected to average about 92.1 Bcf/d, 10pc higher than a year earlier, according to EIA estimates, while production in 2020 is expected even higher.

Producers make drilling plans months in advance, so responses to low prices are delayed. Tapered production growth is unlikely to lead to a quick rise in US gas prices, said RBC Capital Markets analyst Scott Hanold.

Instead, RBC forecasts that prices will recover gradually in the next few years. Prices at the US benchmark are forecast to average $2.45/mmBtu in 2020, down by about 5pc from the 2019 average, the EIA said in its December Short-Term Energy Outlook. That forecast was revised down by 3¢/mmBtu from the November outlook.

High prices this winter could delay tapered production decisions by companies that have not yet pared growth outlooks. But those that have already planned for measured output next year likely will not "flex back to growth" on weather-related price spikes, Hanold said.

Price spikes this winter are likely to be muted by unusually high inventory levels. A wave of cold weather in November 2019 led to a surge in futures prices early in the month, but that increase was short-lived as inventories were close to the five-year average. That's a contrast to November 2018 where high heating demand led to a more sustained price spike as stocks were well-below the five-year mark.

Natural gas infrastructure company Williams, which gathers and processes about 25pc of the gas production from the Marcellus, said in its most recent earnings call that production gains in 2019 would not last into 2020.

Williams' gathered volumes in Appalachia will grow by 3.5pc in 2020, down from its previous outlook for 5.5pc growth. In contrast, third quarter 2019 volumes rose to 8.7 Bcf/d, a year-over-year increase of 17pc.

Measured output growth will keep Nymex prices at what Hanold described as a "sustainable level" between $2.50/mmBtu and $2.75/mmBtu.

By McRae Peavy