Natural Gas Prices Drop Following Strong Production

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Following a short-lived price increase in Novem­ber, natural gas prices have dropped to their lowest levels since September 2012, reflecting strong domestic produc­tion and inventory builds, reports the Energy Information Administration (EIA). The 2013-2014 winter’s sustained cold weather and record drawdown of inventories led Henry Hub prices to spike to five-year highs, peaking at a monthly average of $6/MMBtu in February 2014. Heading into the summer injection season, inventories were at an 11-year low and nearly 1 Tcf lower than the five-year (2009-2013) average levels. Prices remained elevated through the spring and early summer of 2014, but dropped as domestic production continued to set new records and inventory rebuilds remained strong.

The 2014-2015 winter heating season began with colder-than-average temperatures in November. Prices at the national benchmark Henry Hub rose to the mid-$4/MMBtu range, possibly reflecting supply concerns and expectations of another extremely cold winter. For the week ending Nov. 21, 2014, inventory levels fell by 162 Bcf, tying the largest weekly November withdrawal on record. Since then, smaller-than-average withdrawals for most of this winter have brought stocks back above year-ago levels and closer to the five-year average.

In recent weeks, prices have dropped to the lowest levels in more than two years. On Dec. 23, 2014, day-ahead Henry Hub spot prices fell to $2.97/MMBtu, the first time they were below $3/MMBtu in more than two years. Since the end of December, both spot and futures prices have hovered around the $3/MMBtu mark, and closed at $2.92 and $2.88, respectively, on Jan. 26. Prelim­inary data sources show increased natural gas production through early winter, with production rebounding quickly from freeze-offs in November and early January.

Based on National Oceanic and Atmospheric Administration projections for close-to-normal weather for the rest of winter, EIA’s “Short Term Energy Outlook” sees inventory levels at close to the five-year average for the rest of winter, entering the summer injection season at 1665 Bcf. The strength in inventory builds, as well as expectations for continued production growth, contribute to relatively low forecasted prices throughout the year. EIA also expects monthly average prices will remain below $4/MMBtu through most of 2015 and 2016.

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