The natural gas market in mid-April traded down to a spot price low last reached nearly 3 years ago as it is currently in the post-winter “shoulder” season between lower winter heating demand and little summer cooling demand.
The winter of 14-15 was a second colder than normal winter in a row nearly equal to the previous winter 13-14 when spot natural gas spiked to a $6.493/MMBtu winter high. However, storage withdrawals during the November-March period for this current winter totaled 2,116 Bcf (billion cubic feet) well below the winter 13-14 withdrawals of 2,960 Bcf. End of March storage of natural gas for 2015 was 1,461 Bcf, 79% or 825 Bcf above last year’s level, but 12% below the 5-year average.
In the April Short Term Energy Outlook, the EIA predicted end of October storage would rise to 3,781 Bcf with a net injection of 2,310 expected this upcoming summer. During the 2014 injection season (April 1st-October 31st) a record large 2,745 Bcf was put into storage but over the past 10 years, storage injections have averaged 2,047 Bcf.
Dry natural gas production continues to trend near all-time highs with production over this past winter averaging 73.1 Bcf per day, 6.4 Bcf per day higher than winter 13-14 according to a Bentek report. Increased production has been the primary factor affecting market prices.
However, there are two factors on the demand side that may begin to offset higher production. The first factor is increased power generator demand for natural gas which was a record high 23.1 Bcf per day during January and February 2015. Power generator demand is forecast by the EIA to increase by 2.57 Bcf per day (an 11.5% increase) from 2014 with total demand expected to rise to 76.3 Bcf per day from 73.5 Bcf per day in 2014.
A second factor which may turn natural gas prices higher later this year is a drop in crude oil production. Associated gas production from shale wells, particularly crude oil wells, has kept total production of natural gas high even as rig counts plummet to 20-year lows. The EIA expects shale crude oil production to fall 45,000 barrels per day in May, the first monthly decline in 4 years.
Both the natural gas and crude oil rig counts have plummeted from highs reached last October. At some point, the falling rig count will affect production in both markets. This decrease in production may be arriving sooner than many analysts predicted earlier this year.
Technically, the summer 15 and winter 15-16 natural gas strips both broke out to the downside in late-March from triangle consolidation patterns. Triangles typically appear near the end of a price trend. The last time triangles formed in the natural gas market was during early-2012 during a period when the market set a multi-year price low.
Current weakness in the natural gas market could be similar to 2012 with the possibility for a long term price low to be set over upcoming weeks.
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