EIA expects a 14% drop in natural gas production

Mike Zaccardi, CFA, CMT

Utilities pay attention to the EIA’s Short-Term Energy Outlook published each month. The vast report contains the government’s latest estimates for oil, natural gas and renewables. Rarely are there shocking changes, but this year is not normal as well understand well.

Some highlights that struck me were contained in the natural gas section – not surprising, right?

The EIA expects natural gas storage to hit a record 4.1 Tcf by the end of October. I don’t pay much attention to forecasts when there is a good financial market available. In this case, the ICE exchange provides an end-of-storage season marketplace where traders can put their money where their mouth is. Currently, the trading market is near 3.975 Tcf – so slightly more bullish (less supply, higher prices) than the EIA.

What else caught my eye? Natural gas production. This is a huge wildcard for the rest of the year and really through 2021 as low oil prices make their mark in the energy world. Oil producers have already announced big-time production cuts, which will of course eat into natural gas production.

The EIA expects production to eventually crater to 83.6 Bcf/day by March 2021 – that is down from the all-time high of 96.2 Bcf/day during November 2019. In fact the all-time daily high was struck on November 30 last year. So we are talking 13-15 Bcf/day of production declines – many analysts consider this bullish for 2021 pricing. And we see that in springtime end-of-withdrawal season futures already.

As for what’s happening right now in the natural gas market, I’m closely watching the January 2021 contract which trades near the $3.00 level. If production indeed continues to decline and the US economy gradually recovers, then this large premium to the prompt-month price could hold. A lot depends on temperatures this summer, too – we are already seeing record natural gas usage for electricity generation ever.

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Chart used with permission from TradingView.com