Warm weather deepens chill on natural gas markets

With the weather heating up, U.S. natural gas markets are cooling down.

Strong production and the fear that gas inventories could be headed to record highs have sent benchmark prices down by about 40 percent from a year ago.

Demand eventually will rise as new electric power plants, industrial projects and natural gas export terminals step up their intake. But with the boost from those projects still in the future and a torrent of gas flowing from shale formations today, traders are preparing to weather more low prices.

Pearce Hammond, an analyst at Houston energy investment bank Simmons & Co. International, projected that by Nov. 1, natural gas in storage will be near a record 4.1 trillion cubic feet.

The U.S. natural gas benchmark — a contract for delivery next month — settled Monday at $2.71 per million British thermal units on the New York Mercantile Exchange. One year ago, the next-month contract traded for about $4.50 per million Btu, and the price was more than $4 as recently as November.

Prices have trended down as inventories have risen. Stores of natural gas typically fall in the winter when cold weather boosts demand for gas as heating fuel, then increase in the summer.

This year’s storage had room to grow because the frigid winter of 2013-2014 left inventories low.

“We were basically 1 trillion cubic feet below the five-year inventory (average) level. It was pretty intense,” said Tim Evans, an energy futures expert at Citi Futures.

That hole in storage disappeared as the weather began to warm, despite a late cold snap this winter. As of May 29, the U.S. Energy Information Administration put natural gas stores at 2.23 trillion cubic feet, just above the average for the past five years.

“We’re moving the dial from tight to average, and the worry is that the dial keeps moving from average to excess,” Evans said.

The growth in stored gas was driven by massive production as technological innovations increased oil and gas production from dense shale rock. The most recent figure from the Energy Information Administration showed natural gas production in the contiguous United States at 80.8 billion cubic feet per day. Even as lower prices have slowed down exploration, daily production remains 4.7 billion cubic feet higher than last year.

When natural gas production is high, Evans said, the price falls until it becomes cheap enough for market players to buy up the excess. Those buyers are often electricity generators with plants that can switch from coal to natural gas fuel depending upon which is more economic.

One estimate by financial services firm Raymond James indicated that about 5 billion cubic feet per day of natural gas was displacing coal at power plants in May. That figure may need to grow to keep natural gas inventories in check, Raymond James said.

The longer term promises more outlets for the natural gas bounty.

Cheap natural gas has spawned natural gas pipeline projects linking U.S. fields with Mexico, and a boom in construction and expansion of petrochemical plants, which use gas as fuel and raw material.

Many of those ventures will begin buying natural gas when construction is complete next year or later.

The largest potential sinks for natural gas are terminals that will liquefy the gas and load it onto tankers for export. Cheniere Energy’s Sabine Pass terminal is expected to come online by the end of this year, and dozens more facilities are in the works — although some of them may not make it from planning into operation.

But even with new demand coming, some analysts are skeptical that more natural gas buyers could really force prices significantly higher. And with cost savings and new drilling techniques in, natural gas could be headed toward a new, lower price level for some time, said Simmons and Co.’s Pearce Hammond.

“It might be that $3.50 is the new $4,” he said.

SHOW MORE