Higher US natural gas prices are here to stay

Whilst not directly impacted by the Russia-Ukraine crisis, current strength in Henry Hub reflects inflexibility in gas market balances over the coming summer and also the positive longer-term outlook for LNG export demand . Whilst domestic US balances do appear looser next year as the lagged oil production response ramps up (increasing associated gas supply) and the pace of LNG capacity additions slow, price downside will be restricted. We base this on a view that natural gas markets are fundamentally non-stationary, with a higher baseline price for Henry Hub now required based on inflexibility on both sides of the balance . On the demand side, the equilibrating factors used to balance the market during the “gas glut” period (development of largescale LNG export infrastructure and displacing coal from power generation) have become price insensitive as coal generation capacity has shut-down and international gas prices have surged higher. On the supply side, elasticity to Henry Hub and WTI prices is muted given legacy hedging decisions, infrastructure constraints and the broader trend of keeping reinvestment rates low as part of the prevailing capital discipline orthodoxy. Henry Hub prices are forecast averaging $5.5/MMBtu over the injection season and $5.9/MMBtu over WIN22-23. Looser balances in 2023 will push prices lower , although we expect Henry Hub to trade above $4/MMBtu for the balance of 2023.