Natural Gas Update – The Delayed Bull Market

Posted: January 6, 2021

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At the end of October, natural gas prices soared to a 19-month high and after such impressive upward price movements, the RARE PETRO team predicted prices would sustain prices near the $3 per MMBtu range for the final months of 2020 and into 2021. With a cold winter ahead, a historic Hurricane season in full swing, depressed oil production, and soaring LNG exports; the gas futures market appeared to have plenty of price support to maintain its upward momentum into the foreseeable future. Unfortunately, the final months of 2020 were fairly lackluster for the surging gas market but luckily, the new year brings new hope for the struggling sector.

Key Points 

  • The year 2020 shows major price volatility in the natural gas markets as they recorded a 25-year low of $1.432/MMBtu in June and a 19-month high of $3.396/MMBtu in October. In November, RARE PETRO predicted the natural gas market would be able to sustain Henry Hub prices near $3/MMBtu for the remainder of 2020 and into the first part of 2021. This prediction did not appear to be accurate due to several assumptions that did not hold true.

  • Seasonal factors related to weather patterns for La Niña were not as cold as originally projected during the last two months of 2020. Speculation on a colder than normal winter season helped to drive gas futures in the fall, but household heating demand did not meet projections for the first half of winter.

  • Associated gas during Q2 & Q3 2020 declined because many shale wells were postponed or shut-in due to reduced economics. As oil prices improved in Q4, more production was returned to market causing downward pressure on gas prices during that time period. With gas-oil-ratios (GOR) for some of these wells as high as 6:1, resuming production had downward pressure on natural gas futures.

  • With continued assumptions for colder weather heading into 2021, natural gas demand is expected to increase for home and office heating. Additionally, increased LNG demand from China is expected to return to pre-COVID levels of 9.0 Bcf/d and provide upward support for gas prices. The EIA is anticipating U.S. inventory withdrawals will outpace the 5-year average through the remainder of the winter season ending in March 2021.

  • Several institutions are bullish on natural gas heading into 2021. The EIA estimates an average 2021 price of $3.14/MMBtu while other analytics firms like Raymond James & Associates are projecting $3.50/MMBtu, while Morgan Stanley believes $5.00/MMBtu is possible in the coming year.

  • Increased demand for heating as a result of colder weather paired with additional LNG exports should drive down inventory supplies at the beginning of 2021. As oil prices continue to remain between $40 to $60 per barrel, reduced capital development programs and uneconomic wells will extend the reduced production of associated gas. Although last year’s initial projections were not wholly accurate and the timeline could change again, cumulatively these factors support a bullish sentiment on natural gas.


The RARE PETRO Media Team has been following the global pandemic, social and political unrest, and global oil markets in recent months, but it is time to return to a commodity that typically gets less of the spotlight: natural gas. Natural gas prices hit a 25-year low in the spring of 2020 as lockdowns to slow the spread of the pandemic and the closure of businesses reduced gas demand. After recovering most of its losses, natural gas prices started falling again to bottom out in summer 2020 as U.S. shale oil producers reduced output in response to a record drop in U.S. oil prices. The reduction in associated gas from shale wells in turn caused less overall natural gas production. The gas market rallied strongly from late September until the end of October, as an active hurricane season in the Gulf of Mexico further reduced production in the region while demand rose in the U.S., Asia, and Europe as economies began to reopen. These wild swings showed natural gas post a 25-year low in June when the Henry Hub price touched $1.432/MMBtu, but by the end of October it climbed to a 19-month high of $3.396/MMBtu [9]. In November, the RARE PETRO team predicted prices would sustain prices near the $3 per MMBtu range for the final months of 2020 and into 2021. So how did these predictions fair? 

November Projections

Back in early November after Natural Gas soared to a 19-month high, the RARE PETRO Team made the following prediction: “while natural gas will likely not reach historic highs seen in the mid-to-late 2000’s, it is probable that market forces will sustain prices near the $3 per MMBtu range for at least the next quarter and possibly further into 2021”. Unfortunately, the prediction ended up being a bit off. After the periodical’s publication on November 4th, natural gas prices began to sink yet again and fell to a mere $2.31/MMBtu just before the end of the year on December 28th. 

Figure 1: Henry Hub Spot Prices Since October [10]

These predictions were based on four key assumptions: cold weather, associated gas production, Hurricane outages, and LNG exports. Cold weather means warm clothes, warm houses, and subsequently peak demand and withdrawal season for natural gas. With the arrival of La Niña, colder than average temperatures were expected across the U.S. which in turn created anticipation to drive up demand. The previous two Novembers had shown peak demand during this time period. While prices were not expected to indefinitely remain at severely elevated levels, colder weather in winter months typically drives up demand to heat buildings which drives up prices in the natural gas market. Unfortunately, this was not the case closing out 2020 as significantly warmer than normal temperatures reduced residential space heating demand for natural gas despite many remaining at home in response to the pandemic.

Another factor that supported the steady rise in prices for the natural gas market was the associated gas production that came offline as a result of shut-in oil wells following COVID-driven demand destruction. Lower oil prices caused domestic production to fall, which created uneconomic wells to operate and less drilling. The reduced oil production caused associated gas production to drop rapidly. With less supply on the table and growing demand for the winter season, prices were expected to continue to climb for the near term. When oil prices began to rebound, previously shut-in oil production and its associated gas was returned to the market which hindered the upward trajectory in natural gas prices. Although less significant than associated gas production from shale well regions, hurricane outages also limited domestic natural gas supply. With platforms evacuated and production down typically less than a couple of days, the effects on overall supply were fairly minimal. While 2020 was the worst Hurricane season in recorded history with 30 named storms, 13 of which were hurricanes, the season has ended and this supply disruption is history [1].

Lastly, historic LNG exports in November further supported the natural gas market. Aside from weather induced demand increases, the natural gas market was largely influenced, and at times driven, by liquified natural gas (LNG) demand. U.S. natural gas futures jumped over 4% at the beginning of October on forecasts of more demand over the following two weeks than previously expected due to a rise in LNG exports [2]. Demand increases were further supported through actions taken by the U.S. Department of Energy in late October that extended the terms of three long-term LNG export authorizations through 2050 [3]. As a result and according to EIA estimates, the U.S. exported a total of 9.4 billion cubic feet per day (Bcf/d) of LNG in November 2020, beating the previous record set in January 2020 totaling 8.1 Bcf/d [4]. While this spelled good news in the near term, prices still began to fall closing out a historic 2020.  

Reasons For Price Reversal 

So why did natural gas reverse its upward trend at the beginning of November? Plain and simple: production disruptions drive natural gas prices while demand remains low. The natural gas price outlook is driven by seasonal factors affecting supply and demand as weather patterns determine how much gas is consumed for industrial, commercial and residential heating supply as well as electricity and cooking fuel [5]. Gas is typically injected into storage during the summer when demand is low and withdrawn during the winter to meet the demand for heating, so production and storage injection levels also influence the commodity’s value. This relationship means natural gas prices typically rise during the winter – when demand for heating is at its highest – and fall during the summer. So why did prices fall in 2020 during the time period historically known as peak demand season? The answer lies in the weather fluctuations and changes in shale well associated gas production. 

Gas prices fell in November as the weather in the U.S. had been warmer than forecasted, negatively weighing on residential and commercial demand for gas. Jack Scoville, an analyst at the Price Futures Group, noted: “above average temperatures across the nation suggest that the heat is off for natural gas bulls. A tight market based on a long-term weather forecast calling for a November arctic blast that turned out to be wrong is now going into deep retreat mode” [5]. But it is not just a demand story. While the pandemic did not hurt natural gas demand as badly as oil, it still had some negative effect. The IEA estimated earlier this year that natural gas demand would fall by 5% here in the United States, but updated figures by the EIA expect it to fall by about 2% [4]. Regardless of the level of reduction, lower demand should equal lower prices. So why were prices climbing during the pandemic? This is where associated gas production comes into play. 

The shale revolution has made the United States into the world’s largest producer of both oil and natural gas [5]. It began with a natural gas focus but quickly expanded into oil shale plays as well. Domestic crude production soared and so did the natural gas output as a byproduct, even with six times as many rigs drilling for oil than for gas. As production cratered resulting from COVID-driven demand destruction, natural gas production also fell at historic rates. Increased crude prices have caused more oil plays to restart production closing out 2020, and the associated gas is starting to come back online. Typically the winter months indicate peak withdrawal season, but warmer than anticipated winter weather and more gas returning to the market recently has seen significantly less gas being withdrawn from storage in the fourth quarter 2020 than initially anticipated. These developments have been weighing on the upward trajectory of natural gas futures prices.  

Glimmer Of Hope

Despite a lackluster finish to the year, there remains a glimmer of hope for the new year as the EIA expects Henry Hub spot prices to reach a monthly average of $3.10/MMBtu in January [6]. Similar to the situation unfolding in the global crude market, prices are expected to rise, but it is taking longer than anticipated. Therefore, rising domestic and international natural gas demand for space heating as winter weather settles in, rising LNG exports, combined with continued light production levels, are expected to send U.S. natural gas prices soaring into 2021. They expect that monthly average spot prices will remain higher than $3.00/MMBtu throughout 2021, averaging $3.14/MMBtu for the year, up from a forecast average of $2.14/MMBtu in 2020 [6]. Remember, the RARE PETRO Team made a similar prediction for the fourth quarter of 2020. However, EIA forecasts the decline in U.S. natural gas production this winter compared to last winter will more than offset the decline in natural gas consumption. This will likely contribute to inventory withdrawals outpacing the five-year average during the remainder of the winter season that ends in March 2021. As a result, without support from associated gas production, U.S. natural gas prices must rise to incentivize gas-focused drilling to bring balance into the overall supply/demand picture.  

Other analytics firms, like those at Raymond James & Associates Inc., expressed an even more bullish view on the future of natural gas, forecasting an average Henry Hub price of $3.50/MMBtu for 2021 [7]. Morgan Stanley analysts, meanwhile, said at the end of November that record production declines and a rebound in winter heating demand could propel Henry Hub prices to $5.00/MMBtu if weather ends up becoming colder than normal this winter [7]. While these two forecasts seem extremely bullish for the current price of natural gas, they hold the same sentiment as both the initial RARE PETRO predictions and those proposed by the EIA. Due to colder weather during the winter season, rising LNG exports abroad, and low production levels; natural gas prices should be poised for a dramatic rebound going into the new year. 


The initial projections made for the future price of natural gas proposed in Bullish Natural Gas Markets had a flawed timeline, but the projections remain the same. While market forces did not sustain prices near the $3/MMBtu range for the final quarter of 2020, they seem to be heading that direction again for the first quarter of 2021. The EIA holds a similar sentiment as they expect Henry Hub spot prices to reach a monthly average of $3.10/MMBtu in January 2021, which is down from the forecasted January average price of $3.42/MMBtu in last month’s Short Term Energy Outlook. [6]. Although the EIA still expects prices to increase in the coming months because of rising space heating demand and U.S. liquefied natural gas (LNG) exports amid declining U.S. natural gas production, the lower January price forecast reflects higher storage levels this winter compared to the previous month. Luckily, the EIA expects that monthly average spot prices will average $3.01/MMBtu for all of 2021, which is up from the forecast average of $2.07/MMBtu for 2020, a good sign for the struggling market [6]. 

After reaching a trough at the end of 2020, natural gas prices are already starting to rebound, and upward momentum for natural gas is probable to continue through the remaining cold winter months. Although November and December were unseasonably warm, La Niña is still expected to bring a colder than average winter to the Northern Hemisphere which will boost demand to heat buildings and homes, especially if more individuals are forced to remain home due to the global pandemic. Increased global demand for LNG will further support natural gas prices as the United States continues its efforts to return to and sustain the LNG export peak from November fueled by China’s increasing demand needs. Luckily, the EIA is now forecasting LNG exports “will return to pre-Covid levels by November…and will average more than 9.0 Bcf/d from December through February” [6].  Although not as significant a driver as increased demand from cold weather and LNG exports, supply constraints from associated gas production is the final driver that will support natural gas prices throughout the remaining winter months. Unfortunately, the timeline on the upward pressure for natural gas prices remains subject to heightened levels of uncertainty since pandemic mitigation efforts are continuing to evolve. Reduced economic activity related to the pandemic has caused changes in energy supply and demand patterns in 2020, and it will continue to affect these patterns in the future. Even if the timeline has shifted, the path ahead appears to still have upward momentum, and it is only a matter of time before natural gas prices begin to rise. 












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