America's power play

Feared natural gas rally short-circuited by cool summer

Rig hands thread together drilling pipe at a hydraulic fracturing site owned by EQT Corp., atop the Marcellus shale rock formation in Washington Township, Pennsylvania.
Ty Wright | Bloomberg | Getty Images

At the onset of the summer, predictions of potentially sweltering heat had some analysts thinking natural gas could stage a new rally.

What a difference a few months can make.

Thanks to milder-than-expected temperatures, Henry Hub is now closer to $3 than the levels above $6 that sent utility bills soaring at the height of a frigid winter. In the last six weeks alone, Henry Hub prices, traded on the NYMEX, have plunged by about 20 percent.

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"Looking back, we find the month of July has been the coldest since 2009 and much colder than the past four summers, which were also unusually warm," noted analysts at Bank of America-Merrill Lynch, in recent research.

"As a result, U.S. natural gas demand has been 1.4 billion cubic feet (bcf) per day lower relative to the seasonal average for July," the bank wrote. "This surplus gas has, of course, moved into storage, softening market balances for next winter."

Also helping is that the U.S.'s most prolific shale formations, Pennsylvania's Marcellus—by far the largest shale gas hub in the U.S. boom—Ohio's Utica Shale and Texas' Eagle Ford, continue to churn out large volumes of natural gas. Bank of America expects Marcellus and Utica production to expand well into 2015.

Munger: Totally against exporting natural gas
Munger: Totally against exporting natural gas

If current trends continue, it would bode well for later this year. In 2013, a hot summer lit a fire under natural gas demand, leaving supplies depleted by the time the "polar vortex" engulfed the country. Replenished supplies this year may help contain prices for consumers, who are still smarting from a run-up in electricity and heating costs that skyrocketed by more than 40 percent in some regions. The bulk of retail utility price spikes occurred from December to February.

The Energy Information Administration recently projected a record build of natural gas supplies, which should put inventories somewhere above 3 trillion cubic feet by October. Given that utilities burned through that much during the winter-spring, the large supply build provides a cushion in the event cold weather turns extreme again.

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Although the U.S. is accumulating a surfeit of gas supply, the world's largest energy consumer still lacks pipelines to transport it to the neediest markets. The Northeast Gas Association points out that New York and New England are vulnerable to price spikes given the shortage of pipelines in the region.

"There are a couple expansion projects that will help alleviate some constraints but natural gas supplies are still very much [bottlenecked] and have no pipeline capacity," said Luke Jackson, energy analyst at Bentek Energy, in an interview.

Jackson expects new infrastructure to help alleviate price pressures in 2015 and beyond, while Bentek forecasts natural gas topping out this year just above $4 per MMBtu. Still, a lack of pipelines combined with unpredictable weather can easily unravel the benign scenario.

"That's not significantly higher from where we are now, but the weather can make a fool out of all of us," Jackson said.

—By CNBC's Javier E. David