Gas Prices Forecast to Fall to '70s Levels on Pipeline Oversupply

(REUTERS) — An oversupply of natural gas in the United States will drive average prices in real terms at the Henry Hub benchmark to a level not seen since the 1970s, according to a report from IHS Markit on Thursday.

That oversupply will come from new pipelines that will allow a surge of new gas output associated with oil production in the Permian basin in West Texas and eastern New Mexico.

IHS forecast average gas prices in 2020 at the Henry Hub will drop to $1.92 per million British thermal units (mmBtu), their lowest in real terms - including the effect of inflation - since the 1970s.

In nominal terms, prices last fell below $2 per mmBtu in 1995 when they averaged $1.69.

IHS' forecast for 2020 is the lowest of any analyst in a Reuters poll of Henry Hub price projections, which was calling for an average of $2.75 for 2020.

Spot prices at the Henry Hub have averaged $2.62 so far in 2019.

IHS said prices would drop next year despite robust domestic demand, which has increased by 14 billion cubic feet per day (bcfd) since 2017, and rising exports.

The United States is expected to export an additional 3 bcfd of liquefied natural gas (LNG) in 2020, IHS said.

That will not be enough to absorb production that has grown by more than 14 bcfd since January 2018, IHS said, noting it expects output to average more than 90 bcfd in 2019 and 2020. Dry gas output averaged a record 83.4 bcfd in 2018.

"It is simply too much too fast," said Sam Andrus, executive director, IHS Markit who covers North American gas markets. “Drillers are now able to increase supply faster than domestic or global markets can consume it."

Two key factors will drive the Permian surge - gas associated with oil production, meaning it is less sensitive to low gas price signals, and the addition of gas pipelines that are expected to alleviate transportation constraints and gas flaring.

Kinder Morgan Inc's $1.75 billion Gulf Coast Express pipeline in Texas, scheduled to come online in October, will allow for an additional 2 bcfd of Permian production capacity.

Spot gas prices at the Waha hub <NG-WAH-WTX-SNL> in the Permian basin rose to their highest since March as Gulf Coast Express prepares to enter service, cutting Henry Hub's premium over Waha.

Overall, Permian gas takeaway capacity is expected to increase 6 bcfd through 2022.

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