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Natural gas price forecast 2020 and beyond: to trade, or not to trade?

By Nicole Willing

14:08, 24 April 2020

Natural gas price forecast 2020

Energy commodities have traditionally been an attractive investment as global economic development has driven rising demand. Natural gas, in particular, has become an increasingly important asset as countries phase out the use of coal to reduce carbon emissions. 

But with the energy markets entering a period of lower demand because of energy efficiency policies and economic turmoil, is natural gas still a lucrative addition to a diverse portfolio? 

Are you looking to invest in this commodity but unsure what is happening to natural gas prices and how it is set to perform in the next few years? Are you wondering about future natural gas prices predictions for 2020 and beyond? We have you covered.

This article covers the basics of natural gas investing, reviews the recent performance of the market and takes a look at what the long-term natural gas price forecast looks like.

The basics: what you need to know about natural gas price trends

US natural gas is traded on the New York Mercantile Exchange (NYMEX) and the primary price is set at Henry Hub, a natural gas pipeline located in the state of Louisiana that serves as the delivery point for NYMEX futures contracts.

Natural gas price trends are driven by consumption of the fuel for industrial, commercial and residential electricity supply, heating and cooking. That makes it a seasonal market, as demand for heating spikes during the winter. The amount of gas in storage has an important role to play in determining prices during cold weather, as inventories are built during the summer and drawn down in the winter. Major storms can on occasion cause disruptions to supply.

The natural gas market can also be influenced by the oil market, as gas is extracted along with crude oil. Changes to the demand and supply of oil have a knock-on effect on production of gas. So, although a fall in demand for gas would push down prices, if lower oil demand results in production cuts then the resulting drop in natural gas output would reduce supply. The markets are not as closely correlated as they once were, when more electricity generation switched between using fuel oil and natural gas depending on prices. 

Investors need to be aware of broader economic trends that indicate the demand outlook and affect natural gas price projections. Industrial and commercial consumption rises during periods of economic growth and declines during recessions. Monthly data on the performance of the manufacturing and services sectors offer signals and keeping up-to-date with the development of major weather events and oil market movements will help investors make trading decisions.

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Natural gas historical price analysis: from weather-related spikes to oversupply

To better navigate the natural gas market, investors should understand how the commodity has performed in the past.

natural gas forecast 2020

The natural gas price trend chart shows that the market spiked to historic highs in December 2005, as Hurricane Katrina in August and Hurricane Rita in September disrupted production in the Gulf of Mexico at a time when natural gas supply was already tight. 

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The NYMEX US gas price spiked to $16 per million British Thermal Units (MMBTU), with the devastation caused by the hurricanes leaving around 3 per cent of US gas production capacity shut in. Although storage levels were relatively high, the drop in output kept the supply balance tight during the winter. The price had already climbed from $6/MMBtu to $9/MMBtu, as US production had been declining while gas-fired electricity generation increased.

Natural gas prices spiked again in 2008 before the global financial crisis affected demand, as West Texas Intermediate (WTI) crude oil reached a record high above $148 per barrel at the height of the commodities investment cycle, hot weather boosted air conditioning use and gas storage levels were below average. 

The US natural gas price jumped back above $13/MMBtu in July 2008, with expectations of an active storm season further supporting the market. Hurricane Gustav in August 2008 and Hurricane Ike in September 2008 disrupted output in the Gulf of Mexico and Louisiana. The impact of the storms turned the usual market dynamic on its head, driving natural gas prices up during the summer when supply was tight but subsequently removing support during the winter – when prices dropped back to the $5/MMBtu level.

The ongoing weakness in the economy hit the market in 2009, when natural gas prices dropped to the lowest level since 2002 with consumption remaining low, new shale producers ramping up output and inventories in storage reaching a record high. 

There were only two years prior to 2008 when global natural gas demand fell – in 1975 after the first oil crisis and in 1992 after the Soviet Union collapsed. Winter price spikes have since been smaller, with the continued expansion of US shale production ensuring ample supply. The US became a net exporter of natural gas in 2017 for the first time in close to 60 years. From the 2008 high of $13/MMBtu, prices have fallen below $2/MMBtu in 2020.

What the future holds: natural gas price forecast 2020 and beynd

Volatility in natural gas prices has increased in 2020, as demand destruction caused by lockdowns during the Covid-19 pandemic dragged the market to a 25-year low of $1.55/MMBtu at the start of April. But turmoil on the crude oil market, which saw prices turn negative for the first time later in the month, is prompting production cuts that will in turn reduce natural gas supply – which could push natural gas prices up.

Reduced demand from industrial and commercial gas consumers during coronavirus shutdowns is expected to create a ceiling for prices in the short term. But the latest natural gas price prediction from analysts at TD Securities projects that prices will rise in the long term after some weakness in the second and third quarters of 2020. The analysts expect the NYMEX price to average $1.60/MMBtu during the second quarter, rising to $2/MMBtu by the end of 2020 and $2.50/MMBtu by the end of 2021.

natural gas forecast 2020

The US Energy Information Agency (EIA) is more optimistic in its natural gas price analysis, expecting the Henry Hub spot price to rise to $3.12/MMBtu by December 2020, reaching $3.25/MMBtu by the end of 2021. 

In the longer term, the EIA expects prices to remain below $4.00/MMBtu out to 2050 “because of an abundance of lower cost resources, primarily in tight oil plays in the Permian Basin. These lower cost resources allow higher production levels at lower prices during the projection period,” the agency says in its annual energy outlook.

The bottom line: is natural gas a good long-term bet?

The natural gas forecast 2020 shows the potential for prices to rebound later in the year, but any investment in the commodity should form part of a well-diversified portfolio.

Markets in this article

Oil - Crude
Crude Oil
82.476 USD
0.91 +1.120%
Natural Gas
Natural Gas
1.7690 USD
0.018 +1.030%

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The difference between trading assets and CFDs
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