The natural gas market is suffering from the same problem affecting nearly every commodity class - low demand and increasing production.
Natural gas prices have been blindsided by increased production which in late-2014 exceeded 2013 levels by over 10% and demand which has been much lower than expected.
U.S. dry natural gas production over the last 2 months of 2014 was 8-10 Bcf higher than 2013, double the expected rate topping out at a 73.5 Bcf per day high on December 5th according to a Bentek report.
Higher than expected production and lower than expected demand coupled with selling in other commodity markets, particularly crude oil, have kept buyers largely on the sidelines.
Hedge fund participation in the natural gas market has been muted with last Friday's Commitment of Trader's report showing funds long 107,033 contracts (futures only), up 1,754 from the previous week. To keep this in perspective, the funds were long 488,901 contracts last February, the exact week the market topped out at a 6.490 high. Unlike the crude oil market, where the hedge funds remain historically long, they are staying out of the natural gas market as it has closed down 7 consecutive weeks.
Natural gas prices last Monday spiked higher as the first real weather-related demand increase since November hit the market. Demand during December was 60% lower than the 5-year average. The February contract topped out at a 3.176 high in last Monday's early trade but fell to a 3.811 low the following day. The inability for the market to trade higher, even for a day, as sub-zero temperatures fell across much of the upper U.S. was a very bearish signal.
Spot natural gas today fell to a new 2-year low losing over 5%. With roughly 11-12 weeks left in the current withdrawal season, the market is quickly running out of room for the potential of winter-related demand. There is currently 3,089 Bcf of gas currently in storage. An average of 145 Bcf will need to be withdrawn from storage over the next 11 weeks to reach the five-year average for end of March storage which is near 1,500 Bcf.
With production high and demand low, this year's end of March storage could approach the 2012 end of March level which was just under 2,476 Bcf. In 2012, the market bottomed out at a 1.920 spot low in late-April.
Upcoming weather forecasts remain bearish with today's NWS forecast 6-10 and 8-14 day forecasts above-normal for much of the U.S. Unless the fundamental picture for the market quickly changes, the spot natural gas contract could revisit the sub-$2.000/MMBtu level over the upcoming 2-3 months of trade.
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