Natural Gas Prices to remain low in the near-term

Natural gas spot prices declined again this week with the largest decreases occurring in the western half of the US. The Henry Hub spot price decreased by $0.34 to $3.02 per MMBtu.

 

At the NYMEX, futures prices decreased as supplies continued to be viewed as more than adequate to address near-term demand, including heating-related demand.

 

Working gas in underground storage is estimated to have been 3,204 billion cubic feet (Bcf), which is 19.1 percent above the 5-year (2004-2008) average. 

Significant price declines at all markets in the lower 48 States occurred during the report week, as supplies continued to appear more than adequate in the near-term and the likelihood of a hurricane-related disruption in production appeared limited.

 

Many spot prices are trading at near 7-year lows, with no daily market prices exceeding $4 per MMBtu and many below $3 per MMBtu. Particularly in the Northeast, there was substantial demand in the electric power sector to meet air conditioning needs. However, current supplies easily met this increase in consumption.

 

Factors on both sides of the market place have contributed to the price declines over the past several months. Recent reductions in natural gas price levels may be related to continued strength in domestic production capacity, specifically in unconventional gas fields such as the Barnett Shale in Northeast Texas and the Haynesville Shale in Louisiana.

 

At the end of trading yesterday, the 12-month strip, which is the average for futures contracts over the next 12 months, was priced at $5.14 per MMBtu, representing a decrease of about 27 cents in one week.

 

Beginning with the September 2009 contract, futures prices increase sharply through the beginning of 2010. The highest-priced contract in the futures strip until the end of next winter is the February 2010 contract, which closed at $5.44 per MMBtu.

 

Working natural gas in storage totaled 3,204 Bcf as of Friday, August 14, 2009, according to EIA’s Weekly Natural Gas Storage Report (see Storage Figure). The implied net injection during the report week was 52 Bcf, bringing the current level of supplies in underground storage to 513 Bcf or 19% more than the 5-year (2004-2008) average for this time of year.

 

Current stocks exceed last year’s level by 562 Bcf. The net injection during the comparable week over the past 5 years averaged 56 Bcf, while the net injection for the comparable week last year totaled 82 Bcf.

A significant differential between current spot prices and prices for NYMEX futures contracts for next winter delivery provides a strong economic incentive for the high level of storage activity this year.