Prices for natural gas fell to a near six-month low early this week following forecasts for lower summer temperatures. On July 9, contracts for August gas traded as low as at $4.17 per thousand cubic feet (Mcf) on the New York Mercantile Exchange.

“Cooling patterns expected to hit the Midwest and Northeast over the next six to 10 days have investors betting utilities won’t need to burn as much natural gas in the weeks ahead, as summer demand for electricity to run air conditioners eases,” the Wall Street Journal reported on Monday.

Natural gas production in the lower 48 States reached 68.1 billion cubic feet per day (Bcf/d) for June, according to the latest estimates from Bentek Energy. The U.S. Energy Information Administration (EIA) reported an eighth consecutive week of producers injecting 100 Bcf or more into natural gas to storage, helping replace withdrawals made during the colder-than-average 2013-2014 winter. The EIA expects natural gas consumption in the power sector to increase to 22.8 Bcf/d in 2015, encouraged to switch to cleaner-burning gas fuel by lower prices and the retirement of some coal plants.

The near-month future contract for natural gas traded above $6 per Mcf in February 2014, but since then prices have remained largely in a range near $4.50 until the recent drop.

EnerCom’s Natural Gas Price Forecast Model, released on July 8, calls for NG1 natural gas contracts (one month forward contract for natural gas) to be in the $4.50 to $5.00 per Mcf range through yearend, with a general trend approaching $6.00 in Q1 2015.

Source: Data compiled by EnerCom

Source: Data compiled by EnerCom

What Goes Into Forecasting Natural Gas Prices?

The majority of natural gas price forecasts rely principally on production (supply) and weather (demand) to generate predictions. Unexpected milder temperatures, either warm winters or cooler summers, will reduce demand, and prices for future contracts for gas will react to the sudden oversupply.

The EnerCom model uses forward-looking indicators and more than 80 data points, including both quantitative and non-quantitative variables. The model has achieved a 92% correlation between predictions and actual NG1.

A key variable that few price predictors openly recognize is the marginal cost of supply. EnerCom sees a declining trend in the marginal cost of supply. Low cost leaders like Range Resources (ticker: RRC), EQT Corporation (ticker: EQT) and Cabot Oil & Gas Corporation (ticker: COG) have driven finding and development costs down for the past two years.

“Although there will be seasonal fluctuations, in today’s oversupplied natural gas market, we believe the low-cost leaders have shifted the supply curve lower, reducing the mean NG1 price around which price variability will occur,” EnerCom said in a recent Industry Data and Trends report.

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