American Oil and Gas Reporter - May 2020 - 36

SpecialReport: Natural Gas Outlook
While oil prices will recover, it may take quite a while
before total U.S. oil production gets back to where it was at the
start of 2020. As a result, at least for the next few years,
production of associated gas is likely going to be much lower.
Oil-driven associated dry gas accounts for roughly 18 billion
cubic feet a day of U.S. supply. We see a potential decline of as
much as 9 Bcf/d by
the end of this year,
or half of the total
supply (Figure 1). To
put that into perspective, the potential decline is roughly equivalent to current U.S.
liquified natural gas
exports.
In this context, we
should see natural
gas prices strengthen
considerably by next
winter. As always, a
lot will depend on
weather, but assuming normal winter
temperatures, we expect the natural gas
market to tighten a
great deal during the
winter months and remain relatively tight into 2022. We also would expect that, in
that circumstance, the question of the extent to which
production can increase in Appalachia, the Haynesville, and
to some degree, the gassier portions of the Eagle Ford, will
become a fairly central issue. With higher prices anticipated,
there will be substantial growth opportunities in those dry
gas plays.
There are many implications of such a large loss of associated
gas production, but the new normal going forward will be a
return to the days when an increase in gas demand required a
corresponding increase in dry gas production. Since associated
gas is a byproduct of tight oil development, it grew rapidly even
when gas prices were low. Looking forward, gas production
will be much more responsive to price signals. This will help
support higher prices and lead to dedicated gas drilling activity
levels not seen in years.

Q: How quickly do you see associated gas output
falling? How will that influence prices heading into the
end of the year and the start of the winter heating season?
WEISSMAN: I suspect we are going to hit the wall very
soon in terms of running out of storage capacity for oil and
finished products. U.S. oil production may need to be cut by as
much as 3.0 million-4.0 million barrels a day in a very short
time. We already are seeing the biggest falloff in well completion
activity in history. Unfortunately, cuts of that severity are
necessary. Negative pricing does not leave one much of a choice.
The rapid decline in oil production will lead to an abrupt and
36 THE AMERICAN OIL & GAS REPORTER

proportionally large decline in associated gas production. Our
modeling indicates that associated gas supply will decline by
4.0 Bcf/d-5.0 Bcf/d in the three months from April 1 to June 30.
With this kind of sudden monumental supply shock, we
expect lots of price volatility. The forward curve for natural gas
can jump quite a bit when oil production drops abruptly. Later
this year, we see additional
production cuts coming that
may stun both the oil and
gas markets. For natural
"Looking forward, gas
gas, the supply shock may
come sooner and will lead
production will be
to significantly stronger average prices in 2021-22
much more responsive
and perhaps beyond.
to price signals. This
But before higher prices
are realized next winter,
will help support highthis summer and early autumn are going to be very
er prices and lead to
challenging for gas prodedicated gas drilling
ducers. The most likely
scenario is that the market
activity levels not seen
experiences two phases.
First, with large demand
in years."
losses from COVID-19,
there is a substantial pos-Andy Weissman
sibility that supply will be
on a trajectory during this
year's injection season to
exceed the total amount of usable storage capacity. As a consequence, prices could fall to new lows in early fall. It is possible
that prices temporarily could dip to below $1 an Mcf before
firming at the start of the heating season. How low prices go
will depends largely on the strength of U.S. LNG exports and
the speed with which declines in associated gas supply occur.
The good news is that with anything resembling normal
temperatures, prices should increase sharply this winter. We
think it is possible that 2020-21 will be the best winter for
natural gas since 2014, when NYMEX Henry Hub prices
climbed to nearly $5 an Mcf. There is definitely a good chance
prices will get to the $3.00-$3.50 range. Is it possible that
prices can climb well above $4? Yes, I think so, if the start of
winter is reasonably cold, partly because associated gas production
is likely to continue to decline during the winter with oil
producers completing so few new wells. I see that price strength
continuing past next spring into the rest of the year.

Q: To put market fundamentals aside for one moment,
do you foresee any potential aftershocks from the COVID19 response that could alter natural gas supply and
demand fundamentals even long after America gets back
to business?
WEISSMAN:There will no doubt be surprises and unforeseen
dislocations. I tend to focus on the LNG market, but my concerns
there mainly regard the risk of larger-than-expected export curtailments. Another wildcard could be the November election. It

American Oil and Gas Reporter - May 2020

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