Morgan Stanley Sees Potential for $5 Natural Gas

HOUSTON (P&GJ) — A record decline in natural gas production and rebounding demand could create the tightest market in a decade and set the stage for Henry Hub prices up to $5/MMbtu with cold weather, according to a new Morgan Stanley forecast.

Winter storage draws could potentially exceed those during the 2013-14 polar vortex, Morgan Stanley predicted, increasing its 2021 Henry Hub forecast to $3.25/MMbtu from $3.05 while setting a weather-dependent upside price of $5.

Morgan Stanley cited production declines resulting from sharp reductions in E&P spending combined with recovering demand, led by a recovery in LNG exports.

Associated gas from oil production has been a key overhang for Henry Hub prices in recent years, but Morgan Stanley predicted associated gas production will fall around 3-4 Bcfd this year, with potential for further declines in 2021. The declines are not isolated to the oil basins, it said, noting that rig counts also have fallen in the Haynesville and Marcellus basins.

“Weak spot prices this summer, balance sheet stress and minimal access to external capital has left gas producers with production declines of their own, and limited ability to proactively increase capex in response to the upcoming market tightness,” the forecast said.

To address the impending supply-demand imbalance, Morgan Stanley sees the need for materially higher 2021 prices to incentivize much needed investment in additional supply and gas-to-coal switching.  It left its long-term $2.75 forecast unchanged.

Global gas oversupply led to substantial cancellations of U.S. LNG exports over the past summer.  After averaging around 6 Bcfd in September, however, Morgan Stanley expects LNG feedgas to stabilize around 9-10 Bcfd in the fourth quarter of 2020, with year-over-year demand growth of 5-6 Bcfd throughout winter 2020-21, assuming normal weather.

If the season turns out to be colder than normal, however, U.S. gas inventory levels could fall to their lowest level on record, it said, prompting a material price rally to $5/MMbtu or more and a mid-$4 average price range for all of 2021.

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