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Natural Gas Prices Fall Further On Supply Glut, Warm Weather

Natural-gas futures hit a fresh 10-year low Thursday and will likely decline further as the latest supply data confirms an abundance of U.S. gas supplies amid new predictions for a warm winter.

"We just got a report from NOAA about February temperatures being above average," said John Kilduff of Again Capital. "That means there's going to be below normal demand for the time being. It's good news for consumers, and as far as natural gas prices go, you can only argue for them to go lower and lower."

Natural gas futures touched $2.33 per million BTUs Thursday, the lowest price for the front month contract since March, 2002. The U.S. Energy Information Administration reported that total domestic gas inventories fell by 87 billion cubic feet, less than expected, to 3.290 trillion cubic feet.

A new forecast from the National Oceanic and Atmospheric Administration Thursday predicted February temperatures for most of the central and eastern U.S. would be above normal. Temperatures will be most above normal from the southern mid-Atlantic states through the deep south, while the Pacific Northwest will see below normal temperatures.

Kilduff said the storage estimates for the winter season’s end, March 31, range from about 2 to 2.4 trillion cubic feet, well above the average 1.5 trillion cubic feet.

“This is a classic case of oversupply,” said Daniel Yergin, chairman of IHS CERA.

The decade low prices come as the Department of Energy considers industry requests to use the bountiful natural gas supply to feed the export market.

Government analysts Thursday issued a report, noting that natural gas prices would rise for consumers if the U.S. were to increase natural gas exports. Seven natural gas terminals, once expected to import gas, have now applied to be export locations instead.

The Energy Information Administration report forecast that increased exports would add 3 to 9 percent to natural gas prices between 2015 and 2035 for residences and industry, depending on a number of variables including the amount exported.

“Up until 2008, the expectation was that we were going to be a huge natural gas importer, and in fact we were on a course to bringing in $100 billion a year of imported LNG (liquefied natural gas),” Yergin said.

Yergin said the price and abundance of natural gas in America has also made it more palatable for industry to consider locating plants in the U.S. again. He pointed to the example of Dow Chemical and its plans for new petrochemical production in the Gulf Coast region.

“Basically, natural gas is more expensive everywhere else in the world, except for the Middle East,” he said.

The U.S. natural gas supply has gotten a big boost from shale gas production, which has been criticized for its potential environmental impacts, including water contamination. Ohio officials recently halted some activity at wells used for wastewater disposal for oil and gas drilling, due to concerns it created seismic activity.

"This is why it’s going to be such a great debate here going forward. It’s really all about fracking and shale gas. We’ve cut these prices some 80 percent because of it, so what do you do?” Kilduff said. Natural gas hit a high of $15.3780 per million BTUs on Dec. 13, 2005.

“This isn’t like we’re saving 10 cents a gallon on gasoline. This is like gasoline is at 80 cents a gallon. That’s why this is a real difference-maker for the economy and energy prices. You can’t dismiss this as easily as some of the other energy debates we’ve had over the last decade or two.”

Hydraulic fracturing, or fracking, requires millions of gallons of water, sand and chemicals to be pumped into the ground, to break apart rock structures, to free natural gas that was otherwise unobtainable.

“A lot of this debate about the environment is really a debate about whether the states, which traditionally regulated natural gas production, would continue to do so or whether more the of the responsibility would shift to the federal government, in particular the EPA,” said Yergin.

Yergin said shale gas production provides about 35 percent of the U.S. natural gas supply, from 2 percent in 2000.

Yergin said, for now, prices will likely remain under pressure. “Technology can really transform markets. The iPod transformed the music industry. Shale gas technology transformed the North American natural gas industry,” he said.

Kilduff said the decline in futures prices has become self-fulfilling and an important technical level of $2.409 has been breached. He said the forward curve on the monthly natural gas futures contracts encourages investors to pay to take delivery, store the gas, and sell the futures contract.

"That will keep pressure on the spot market. It's only going to encourage more gas to be produced and put into storage," he said.

“We’re behind on degree days. It’s been above normal in terms of the temperature, and that has just collided with a record amount of supply being produced and in storage. We’re going to end the season with a record amount of gas in storage, yet again,” said Kilduff.

Follow Patti Domm on Twitter: @pattidomm

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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