Finding the Silver Lining
Emerging from the crude market chaos is a silver lining for natural gas producers that have endured low prices for several years. Sproule analysts assess the impact of shifting dynamics on the North American gas markets.
All signs point to Up for Henry Hub prices
- The robust growth of U.S. natural gas supply occurred in a very different operating environment from the current market. Natural gas producers are now facing limited access to capital, greater investor expectations of cash returns and reduced capital budgets.
- Also deeply affecting the supply dynamics is the expected reduction in associated gas production as U.S. light tight oil producers shut in production and reduce spending given the significant drop in global crude prices.
- Demand for U.S. natural gas is poised for significant growth in the medium to long term with increasing LNG export capacity, increased exports to Mexico, and a post-COVID-19 domestic demand recovery.
- Despite near-term price weakness for natural gas prices underpinned by high inventory levels and reduced demand from COVID-19 related lockdown measures, the shifting landscape for U.S. natural gas fundamentals are setting up for positive price movement over the forecast period.
- Ultimately, however, the marginal cost of dry gas production growth from plays like the Haynesville, Marcellus and Utica will place a natural ceiling on U.S. natural gas prices, capping out at $3.00 USD/MMBtu over our forecast period.
AECO bullish on low inventories, bearish on weakened demand
- AECO differentials to Henry Hub have been relatively narrow since the announcement of the NGTL Temporary Service Protocol in October 2019, which will prioritize interruptible delivery and storage injection over receipt services during the 2020 planned summer maintenance period.
- Increased access to storage has narrowed AECO differentials to Henry Hub since the announcement, and we enter the summer injection season with the lowest storage inventories in the last 5 years. These drivers should limit exposure to the volatility AECO prices have experienced over the last few summers and help support prices over the summer season.
- On the demand side, with widespread market driven shut-ins of oilsands and SAGD production in Alberta, there is a risk for material domestic demand loss. We see the possibility of losing up to 25% of oilsands natural gas demand over the next several months, or 10% of total natural gas demand in Alberta. This presents as a potential disruption to the positive momentum for AECO gas prices prior to the COVID-19 outbreak.