Natural gas update – EIA sees rising prices

Commodities

Warren Buffet just made a $10bn bet on natural gas after prices hit a 25-year low. In the long term, he seems to think gas will play a key part in the energy mix. But where will natural gas prices head in the medium-term?

In its latest Short-Term Energy Outlook, the US Energy Information Administration argued that prices could rise further over the coming months.

The EIA expects US natural gas consumption will decline by 3% in 2020, largely due to lower consumption in the industrial sector because of lockdown efforts and ensuing reductions in economic activity, which will mean working natural gas in storage could hit record levels by October.

“Forecast US natural gas consumption declines by 5% in 2021 as a result of expected rising natural gas prices. The rising prices will reduce the use of natural gas in the electric power sector, which will more than offset increases in natural gas consumption in the industrial, commercial, and residential sectors,” the EIA said.

Whilst the spot price briefly hit a 25-year low before the last contract expired, average prices also very weak on an historic basis. The Henry Hub natural gas spot price averaged $1.63 per million British thermal units (MMBtu) in June, which the EIA notes was the lowest inflation-adjusted price since at least 1989. The EIA said it expects falling production to put upward pressure on natural gas prices through the end of 2021, forecasting Henry Hub spot prices to average $1.93/MMBtu in 2020 and $3.10/MMBtu in 2021.