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UPDATE 1-U.S. natgas prices to fall to lowest since the 70s - IHS Markit

Thu, 12th Sep 2019 19:24

Sept 12 (Reuters) - An oversupply of natural gas in theUnited States will drive average prices in real terms at theHenry 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 allowa surge of new gas output associated with oil production in thePermian basin in West Texas and eastern New Mexico.

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

In nominal terms, prices last fell below $2 per mmBtu in1995 when they averaged $1.69.

IHS Markit's forecast for 2020 is the lowest of any analystin a Reuters poll of Henry Hub price projections, which wascalling for an average of $2.75 for 2020.

Spot prices at the Henry Hub <NG-W-HH-SNL> have averaged$2.62 so far in 2019.

IHS Markit said prices would drop next year despite robustdomestic demand, which has increased by 14 billion cubic feetper day (bcfd) since 2017, and rising exports.

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

That will not be enough to absorb production that has grownby more than 14 bcfd since January 2018, IHS Markit said, notingit 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, IHSMarkit executive director, who covers North American gasmarkets. “Drillers are now able to increase supply faster thandomestic or global markets can consume it."

Two key factors will drive the Permian surge - gasassociated with oil production, meaning it is less sensitive tolow gas price signals, and the addition of gas pipelines thatare expected to alleviate transportation constraints and gasflaring.

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

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

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

Eventually, downward pressure on prices from rapid growth ofassociated gas will curtail drilling activity and bring themarket back into balance. IHS Markit said it expects Henry Hubprices to rebound and average $2.25 for 2021.

“Rising prices stimulate supply and falling prices curtailit. What is unique here is the extent of reduction required. Butsigns still point to this coming price fall having a limitedshelf life rather than being the new normal,”said ShankariSrinivasan, IHS Markit vice president of energy.

(Reporting by Scott DiSavinoEditing by Marguerita Choy)

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