Natural gas prices are expected to rise in the coming months as a national supply glut is drawn down, according to the US Energy Information Administration. Although prices have been low during the first few months of this year’s winter, lower production volumes and cooler weather are anticipated to bring them up slightly in 2016.
As of January 1st of this year, over 3.6 billion cubic feet of gas were stockpiled in the US, which is about 15% higher than average inventories in the past five years. The large amounts of gas in storage, combined with a record amount of natural gas in the ground and technologically advanced, highly efficient extraction techniques, have created a supply overhang.
The low natural gas prices were further compounded by El Nino, which triggered abnormally warm weather throughout much of the East Coast and caused demand for heating and natural gas to drop towards the end of 2015. 75.5 billion cubic feet per day was consumed on average last year, which is somewhat lower than anticipated future consumption averages. Due to the abundant gas supply and depressed heating demand, natural gas prices and futures have been falling for the past few weeks, dropping to their lowest point in a decade around mid-December.
However, gas prices are expected to begin rising again within the next few weeks and months. The peak heating season in the United States (November to March) is only half over, and cooler weather is anticipated in many areas during the rest of the winter, especially in the southern half of the U.S. A recent cold snap has helped draw down some of the excess gas supply; during the last week of December, natural gas supplies fell more than expected, outstripping the forecasts by over 28%. This led to a surge in prices which was further boosted by speculators, counting on cooler weather to increase demand.
Additionally, production growth has slowed recently, to the point that the Energy Information Administration (EIA) predicts that it will be outpaced by consumer demand in 2016, due to increases in industrial use (especially for the chemical sector) and greater demand for residential and commercial heating.
This increased demand will reduce the natural gas surplus and allows prices to rise; the EIA forecasts that prices will jump from the 2015 average of $2.63 per million British Thermal Units to a 2016 average of $2.65.
Although analysts are making cautious predictions in the short term, the EIA also indicates that prices in 2017 may be as high as $3.22/MMBtu, representing a major leap in prices for next year.