Thursday, February 6, 2014

What's behind the latest natural gas rally?

After years of oversupply driven weakness, US natural gas prices are finally rebounding.

March Nat Gas Futures (source:

What's different this time? Most of the rally is due to the cold winter in eastern/central US (chart below), with significantly higher than average demand for heating.

Source: NOAA

While natural gas production in the US continues to grow (particularly shale - see chart), the recent weather-related demand spike has reduced the amount of gas in storage to levels that are below the range we've seen over the past 5 years.

Spot and the front futures contract prices rose sharply, but the rest of the curve remains below $5/MMBtu. The market views the current spike as temporary - although the whole curve is higher than it has been in quite some time.

At these elevated prices, US production could easily rise, capping further price increases.
CSM: - If prices stay above $5/MMBtu there will certainly be an increase in the number of drilling rigs returning to the gas patch, after many of them migrated westward in search of more lucrative natural gas liquids and oil. The spike is likely temporary though, with April futures prices down to $4.65/MMBtu – still high by the standards of the last half decade, but lower than what we are seeing this winter.
The current elevated price levels are certainly temporary (prices are already beginning to fall as the weather extremes dissipate - hopefully), but we are unlikely to go back to the lows we've seen in 2012 (see post). The US demand for gas is picking up, as more households, businesses, and utilities switch to natural gas. In the long run, increased usage of liquefied natural gas (LNG), including exports, will add to the overall demand.
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