Trailing a momentary price increase during November, natural gas has hit its lowest prices since September 2012, reflecting solid domestic production and inventory builds.
According to the U.S. Energy Information Administration (EIA), “The 2013-14 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 $6.00 per million British thermal units (MMBtu) in February 2014. Heading into the summer injection season, inventories were at an 11-year low and almost one trillion cubic feet (Tcf) lower than five-year (2009-13) 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.”
This winter, the heating season started with below average temperatures in November. The national benchmark Henry Hub rose to the mid-$4/MMBtu range, which could have been due to supply concerns and the expectation of another freezing winter. The week ending on November 21, 2014, inventory levels dropped by 162 billion cubic feet (Bcf), “tying the largest weekly November withdrawal on record.” Since that week, smaller-than-average withdrawals for this winter have brought stock levels above where they were a year ago and closer to average levels from five years ago.
Over recent weeks, natural gas prices have dropped to the lowest levels in over two years. Day-ahead Henry Hub prices fell to $2.97/MMBtu on December 23, 2014, which is the first time prices were below $3 in over two years. Since the end of December, spot and future prices have lingered around the $3 mark and on January 26th closed at $2.92 and $2.88. Reported by the EIA, “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 projections calculated by the National Oceanic and Atmospheric Administration (NOAA), there will be close-to-normal weather for the rest of this winter. According to the January Short-Term Energy Outlook (STEO), inventory levels are expected to be close to the five-year average for the remaining winter months and will enter the summer injection period at 1,665 Bcf. As reported by the EIA, “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.”