Why natural gas prices are low in today’s market is a mystery to many people. Are we on the bottom? Here at My Choice Energy, we get asked about this a lot. So today, I want to answer that question for you.
According to the weather experts, the winter of 2011-2012 was the fourth warmest winter on record at least for the Midwest. This should be great fodder for the global warming alarmists. However, Europe experienced some of the coldest weather in recent memory. Go figure. With this past winter, natural gas demand was down about 20-30% for most parts of the country. This created a huge supply glut and has caused operational issues for utilities that rely on third party storage operators and utilities that have their own storage assets.
Nationally, there are approximately 3900 Bcf (Billion Cubic Feet) of natural gas storage capacity. The inventory balance going into November 1, 2011 was 3840 Bcf, which was a record. So, we truly don’t know what the capacity of the storage fields are capable of until we get there. Some experts believe we can handle 4000 Bcf (4.0 Tcf). Historically, the market never uses the entire balance in storage each year. There is always a carryover for the next injection cycle, which begins on April 1st.
Why natural gas prices are low
For the past five years, the average inventory carryover has been 1548 Bcf. The inventory balance for April 1, 2012 came in at 2479 Bcf, which is 931 Bcf more than the 5 year average. This presents a couple of issues. First, it is a good bet that the national storage inventory could be at 100% long before October 31st, which is typically the end of the injection cycle. This will cause operational issues throughout the summer especially if it is cooler than normal. Second, this will cause spot gas to be cheap and the winter pricing curve to be soft as well. Producers, if it makes operational sense, could shut-in wells to reduce supply and hope for the market to rebound.
Low natural gas prices may not be good news for some people. The consumer is experiencing the lowest prices in a decade and possibly has fueled the economy for the short term. The wholesale price of gas went from over $10 per Mcf (thousand cubic feet) in 2008 to where it is currently trading below $2.00 per Mcf for the May 2012 contract. New technology has brought to market new areas of production (Shale) that were deemed too expensive to recover in past years.
These new areas of focus has glutted the market with natural gas and drop the price to new lows. Most energy analysts have come to the conclusion that the bottom is close. In the meantime, natural gas producers are rethinking on where to allocate their resources. They are focusing on developing oil reserves or liquid rich natural gas reserves where they can sell the liquids in the market place for a better return for producing the natural gas.
These actions will not have an affect on the supply and demand picture at least for another 12-15 months. The risk is not the price going down, but for the price to go up. So if you are waiting to lock in pricing for your natural gas requirements, then now is the time to do it. As you can see, there’s a good reason why natural gas prices are low, but for how long?
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