The drop in crude oil prices is well documented, but will natural gas follow suit with winter approaching?
The West Texas Intermediate spot prices closed at a two year low of $80.52 yesterday, down a total of $19.90 in the last three months (22.9% overall). Price cuts from Saudi Arabia have prompted the market to focus solely on supply news rather than political news, a German trader told Bloomberg on Thursday.
The natural gas market, on the other hand, is not expected to board the same price rollercoaster as its partner fuel source. The National Oceanic and Atmospheric Administration (NOAA) says a repeat of last year’s frigid winter is “unlikely,” when frozen pipelines and stalled operations forced spot prices as high as $123 per MMbtu. Rather, the NOAA forecasts a warmer than normal winter in the western and northeastern United States, while the southeast may receive a cooler than normal season.
The winter of 2013-14 cut into natural gas storage levels, leaving the markets unsure if supply could recover in time for the next withdrawal season. Storage levels were 55% below the five year average at the end of March. Today, roughly seven months later, natural gas levels are just 9% below the five year average. In the time period, 2014 has averaged builds of 88 Bcf per week, compared to the five year average of a 66 Bcf build per week. If the gains continue its trend through the end of inventory build season, the total will be just 5% below the five year average.
“Most people probably didn’t envision we’d have such a fast restocking of natural gas,” said Darwei Kung, manager of Deutsche Bank AG’s DWS Enhanced Commodity Strategy Fund, in an interview with The Wall Street Journal. The gains are a testament to the ever-increasing rate of hydrocarbon production in the United States. Production from February to March in 2014 increased by 12% on a month-over-month basis as the effects from winter finally began to thaw, according to the Energy Information Administration.
Barring the unforeseen freezes that plagued the market last year, EnerCom anticipates natural gas prices to be higher in 2014 than the prices forecast in 2013. The EnerCom model combines 18 different variables to determine future gas prices. The average price for October through December in 2014 is expected to average $4.45/MMBtu, compared to 2013’s estimate of $4.15/MMBtu. Year-end 2014 prices are forecasted at $4.58, compared to 2013’s end price of $4.40.
In January through March, 2015 prices are projected at a midpoint of $4.22/MMBtu, with prices dropping below the $4.00 threshold by mid-March. Prices were consistently above that level in 2014 as gas inventories were limited, averaging a $4.68/MMbtu price in the three month span.
The Wall Street Journal expects gas prices to remain relatively low in its October 23 article titled “Natural-Gas Bulls: Better Luck Next Year.” Late 2015 will be a different situation, according to The Journal, due to coal-fired power plant shutdowns stemming from stricter emissions imposed by the Environmental Protection Agency. A total of 60% of current coal-fired plants are expected to be decommissioned by 2020. Although the article doesn’t believe a jump in gas prices is guaranteed, the seasonal swings will be more extreme due to the increasing dependence of the plentiful resource.
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