Natural gas futures broke the psychologically significant $2 level for the first time since January 2002, and lower prices are coming.
“I think we just keep grinding lower,” said Addison Armstrong of Tradition Energy. Natural gas settled at $1.984 on the Nymex, and traded even lower in electronic trading.
Traders expect to see another build in storage in the weekly Energy Information Administration report, released at 10:30 a.m. Thursday. John Kilduff of Again Capital said he expects to see an injection of 28 billion cubic feet into storage last week.
“The monthly EIA report yesterday just pointed to more production coming on line, a record amount,” he said.
“I think that obviously the price collapse here is reflective of just a perfect alignment of the stars in terms of the above normal winter temperatures and the tremendous increase in production and overall storage capacity,” Kilduff said.
Abundant supply, thanks to shale gas drilling, and the unseasonably warm winter combined to leave record amounts of natural gas in storage. Traders have been expecting to see gas below $2 this spring. Armstrong said the next target he’s watching is $1.96 per million BTUs, then $1.82.
“As we go up through the shoulder season, I would expect even lower prices,” said Kilduff. “I think we would test $1.86 with an eye towards lower, but the industry will react to these new lower prices with cuts in production. Prices will be highly reactive to any emergent cooling demand here because electricity production is going to be overweighted to natural gas.”
In response to record supply, drillers, like Chesapeake , have been shutting down production, and in some parts of the country, drillers have resorted to flaring gas to burn it off.
“I think right now with the way rig count has been falling off in the past few months, we’re going to hinge on the next production report” from the EIA April 30, Armstrong said.
“There’s a couple of factors that really kind of make it inconsequential as to where the price of natural gas is. One is that many of these wells are producing associated oil and the you get natural gas liquids, which are both priced, based on the crude price. The wells are still profitable and certainly in many parts of the country, particularly in west Texas, the dry natural gas is just being flared at the well head,” said Armstrong.
Analysts have said the price of natural gas ultimately depends on the amount of air conditioning needed this summer. If demand is not high, drillers could continue to shut down wells, or even burn the excess as storage space is getting tight.
“But there’s a limitation to that as well, in that the EPA will only allow operators to flare for so long. They’re either going to have shut down or dump that dry gas on the market, at which point we would see a price collapse to $1.65,” Armstrong said.
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