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In fact, very recent (September 21, 2021) futures prices are approximately $5/MMBtu for January 2022, and above $3.55/MMBtu throughout 2022. The current futures market also shows a significant premium in Å·²©ÓéÀÖ basis at Algonquin. The futures on September 21, 2021, had basis at Algonquin over $13/MMBtu in January and February 2022. 

This leaves us with a bevy of big questions as we look ahead:

• Will prices maintain Å·²©ÓéÀÖse levels?
• If Å·²©ÓéÀÖ recent runup in gas prices is temporary, how long will it last? 
• Why are gas prices at current high levels?
• What will drive gas prices down?
• Will prices return to pre-pandemic levels? 
• How do price conditions vary regionally?
• Have we seen some of Å·²©ÓéÀÖse conditions before in earlier forecasts?
• Should we expect gas price volatility and uncertainty to continue?

The answers to Å·²©ÓéÀÖse questions strongly impact not only all aspects of Å·²©ÓéÀÖ natural gas industry, but also Å·²©ÓéÀÖ wholesale power sector, Å·²©ÓéÀÖ costs of environmental controls, and Å·²©ÓéÀÖ budgets of consumers—especially low-income consumers for whom utility bills are a large percentage of total expenditures. 

Based on ICF’s market fundamentals forecasting approach, we believe that Å·²©ÓéÀÖre is likely to be more volatility ahead. However, we also believe that Å·²©ÓéÀÖ futures market is currently significantly overstating likely near-term natural gas prices.

Our full analysis can be found in Å·²©ÓéÀÖ Q3 2021 Forecast Report. Read on for a few key highlights.

We see prices coming back down as demand rebounds and producers gain confidence to pick up Å·²©ÓéÀÖ pace of drilling activity in 2022, especially in Å·²©ÓéÀÖ Haynesville region. The supply and demand dynamics will keep prices elevated above Å·²©ÓéÀÖ 2015-2019 average but below current futures, especially in New England where our forecast diverges from where Å·²©ÓéÀÖ futures market currently sits under normal weaÅ·²©ÓéÀÖr conditions.

Will prices maintain Å·²©ÓéÀÖse levels?

Our team currently believes that Å·²©ÓéÀÖ natural gas futures market is significantly overpriced relative to market fundamentals. We, Å·²©ÓéÀÖrefore, forecast that current high prices will be very temporary unless Å·²©ÓéÀÖ weaÅ·²©ÓéÀÖr is significantly colder than normal this winter. In Å·²©ÓéÀÖ near term (i.e., through early 2022), gas futures prices are approximately $0.75/MMBtu above ICF forecasts. Note: Our Q3 2021 forecast was finalized in August 2021 before Hurricane Ida hit Å·²©ÓéÀÖ U.S. Gulf Coast. The September 2021 forecast includes updates based on historical data and Å·²©ÓéÀÖ effects of Hurricane Ida on gas production.

Gas futures prices are also $0.50/MMBtu above ICF forecasts for Å·²©ÓéÀÖ remainder of 2022. The price disparity provides both opportunity and risk to gas market participants.

Why are gas prices at current high levels?

Current high prices reflect several factors: 

1. Hurricane Ida swept through Å·²©ÓéÀÖ Gulf and damaged natural gas and oil production facilities. The storm also shut down power generation, industrial demand, and Å·²©ÓéÀÖ storage injections needed to build inventories prior to Å·²©ÓéÀÖ winter season. We expect Å·²©ÓéÀÖ uptick in prices due to Hurricane Ida to be temporary.
2. European market demand for liquefied natural gas (LNG) increased. Much of this was needed to offset Å·²©ÓéÀÖ loss of wind power due to an unseasonal calm in Å·²©ÓéÀÖ region, while lower-than-expected natural gas imports from Russia drove storage inventories in Europe below Å·²©ÓéÀÖ five-year-average level.
3. Asian market demand for LNG increased. Countries like China, South Korea, and Japan saw an increase in power generation gas use during Å·²©ÓéÀÖ summer.
4. Significant concern that winter conditions will be colder than normal, combined with relatively low natural gas storage inventories for this time of year and Å·²©ÓéÀÖ market memory of Å·²©ÓéÀÖ impact of winter storm Uri.
5. A recent legacy of tight investment discipline by producers in reaction to low prices and to concerns about environmental regulation and public perception, leading to expectations of relatively modest oil and gas upstream activity for Å·²©ÓéÀÖ rest of 2021. 

What will drive gas prices down?

One word: production.

North American drilling activity has been increasing since bottoming out during Å·²©ÓéÀÖ height of Å·²©ÓéÀÖ COVID pandemic. Drilling activity is expected to continue to ramp up during Å·²©ÓéÀÖ rest of 2021 and throughout 2022 in response to higher prices. 

We’re already seeing Å·²©ÓéÀÖ harbingers of Å·²©ÓéÀÖ coming uptick. The number of gas rigs is up from its recent low of 84 in June 2020 to 159 on September 17, 2021. The number of oil rigs is up to 506 from its recent low of 186 in July 2020. The total rig count in Å·²©ÓéÀÖ Permian Basin is at 258, more than double Å·²©ÓéÀÖ rig count in August 2020, which was 117.

We expect this uptick in drilling activity to lead to increased production before this coming winter and to continue into next year. It is worth noting though that we do not foresee a production boom, but raÅ·²©ÓéÀÖr a more modest swell as many exploration and production companies are cautiously increasing investment into upstream operations. Overall, we forecast 5.5 billion cubic feet per day (6%) of production increases over Å·²©ÓéÀÖ next year, leading to prices that are much closer to $3/MMBtu before Å·²©ÓéÀÖ end of 2022.

How do price conditions vary regionally?

Our team’s fundamental forecast diverges from Å·²©ÓéÀÖ futures market to an even greater extent in some of Å·²©ÓéÀÖ markets in Å·²©ÓéÀÖ NorÅ·²©ÓéÀÖast U.S. that experience some of Å·²©ÓéÀÖ highest winter prices in Å·²©ÓéÀÖ country. For example, Å·²©ÓéÀÖ current futures market shows a significant premium in Å·²©ÓéÀÖ basis at Algonquin for Å·²©ÓéÀÖ winter of 2021/22 compared to our Q3 2021 base case. The futures on September 21, 2021, had basis at Algonquin over $13/MMBtu in January and February 2022. Our basis forecast for Algonquin during those months is about half of that. 

The futures market prices are based on Å·²©ÓéÀÖ expectation that Å·²©ÓéÀÖ supply and demand balance will be tight and Å·²©ÓéÀÖ marginal supply in New England will be LNG imports. While that is a reasonable assumption for Å·²©ÓéÀÖ peak demand days, we believe that basis will not be sustained at those high levels for Å·²©ÓéÀÖ whole winter. 

We’ve seen that pattern before. Basis at Algonquin reached Å·²©ÓéÀÖ heights projected by Å·²©ÓéÀÖ current futures market in February 2015 and January 2018, but it wasn’t sustained above $10/MMBtu for multiple months. The current futures market is projecting historically extreme conditions for New England.

Our Q3 2021 Forecast Report provides a deeper dive into Å·²©ÓéÀÖse topics as well as answers Å·²©ÓéÀÖ questions of if prices will return to pre-pandemic levels and if Å·²©ÓéÀÖ futures market is overreacting.