Natural Gas: Futures price indicates optimism – BMO

The prospects for natural gas have improved, especially compared to the depressed prices witnessed over the past year. Art Woo, Director and Senior Economist at the Bank of Montreal, forecasts Henry Hub to US$2.50/mmbtu in 2021 (previously $2.25) while it has been trading around $1.80 over the past month.

Key quotes

“The increased optimism over natural gas is reflected in the futures market, which suggests that Henry Hub – North America’s benchmark price – could be significantly higher in 2021. The futures market is currently indicating that a producer could theoretically sell all of its natural gas production in 2021 at around US$3/mmbtu. In contrast, Henry Hub has averaged $1.80 over the past month.”

“US natural gas production is expected to decline significantly due to weaker associated gas production from lower shale oil output while US exports of LNG are expected to accelerate on the back of the recent surge in benchmark prices in Europe. These two factors, coupled with the typical seasonal pick-up in natural gas consumption during the winter, are expected to lead to a drawdown in inventories and a tighter market.”

“We revised up our forecast for Henry Hub to US$2.50/mmbtu in 2021 (previously $2.25), compared to an estimate of $1.95 for the whole of 2020. Meantime, the price of AECO – Western Canada’s natural gas benchmark – should be able to piggyback on higher Henry Hub in the coming quarters. As a result, we are projecting AECO to average US$1.75/mmbtu in 2021, up from $1.60 in 2020.”