Oil Crash Could Support Gas: Sproule
The crude oil demand crash that is expected to reduce global Q2 2020 demand by as much as 20mn b/d could bring some temporary relief for Canadian natural gas producers, an April 6 report by Calgary-based consultant Sproule says.
Associated production from the Permian basin in the US has grown at an annual compound rate of 30% over the last three years, and the Permian now produces an estimated 17bn ft3/day, as much as all of western Canada.
But with shale producers ratcheting back spending plans for 2020 in the face of the Covid-19 pandemic – which has reduced auto travel in the US by as much as 50% and air travel by 90% – 30% growth will be unattainable in the new operating environment, Sproule says.
“Ultimately, this means easing pressure on an oversupplied US natural gas market,” the report notes.
With US gas storage exiting the winter season 17% above the five-year average, and domestic US demand projected to be 20% to 30% lower in Q2 and perhaps 5% lower for the year, benchmark Henry Hub gas prices will face near-term weakness through the shoulder months of April and May, Sproule says.
“However, we expect to see positive pressure on pricing towards the end of 2020 and into 2021 as producers rein back spending and reduce associated gas production growth.”
Sproule’s latest forecasts see Henry Hub averaging US$2.00/mn Btu this year and rising to $2.50/mn Btu in 2021 and to $2.75/mn Btu in 2021.
The benchmark Canadian price at Aeco, the report says, will see similar stability and modest growth, averaging C$1.43/mn Btu (US$1.02/mn Btu) this year and rising to C$2.05 and C$2.33 in 2021 and 2022, respectively.
But while Aeco-Henry Hub differentials have narrowed since last fall when changes were made to ease access to storage in western Canada, and low storage levels in Canada exiting the winter heating season will reduce Aeco volatility, Sproule doesn’t expect that condition to hold.
“Ultimately, Aeco gas is still the marginal molecule flowing into a well-supplied North American gas market, and we do not expect to see sustained narrowing of the differential until access to Asian markets via LNG is achieved,” the report concludes.