American natural gas prices are at their lowest since February.
As I write this, Henry Hub (the primary confluence of pipelines in northern Louisiana at which the NYSE daily futures contract price is pegged) is off $0.11 to $2.79 per thousand cubic feet (or million Btus), having lost 8.8% in value for the week and 12% for the month.
The reason is simple: Overall demand is coming in lower than this time last year.
But that's not going to last for much longer.
You see, there is a major catalyst in the natural gas market that could soon send prices through the roof in 2018.
Natural Gas Price Squeeze
The reason why American natural gas prices have plummeted boils down to two things:
- An excess of supply
- Unusually warm weather
Most of the retreat is tied to the supply side.
Expectations by year-end indicate that natural gas demand will be down 3, with production up 7%.
In a nutshell, that is the reason for the pricing squeeze.
Yet here is where it gets interesting.
Quarterly natural gas production estimates have been trending downward lately.
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Current analyst projections average 77.1 billion cubic feet/day (bcf/d) in December and January, lower than the 84.6 bcf/d expected for the figures through Friday of this week.
We are moving toward a supply balance deficit of slightly less than 40 bcf/d. This is the first negative physical balance since mid-March.
The wild card is now the weather.
Assuming we have a normal winter, there should be a base forming to support a slow rise in price from about $3 per 1,000 cubic feet.
However, this also has a downside.
A stable floor at $3 will encourage some new drilling (since it is marginally profitable in many drilling basins at that price).
But that doesn't mean there aren't bullish indicators for American natural gas prices going forward.
Actually, it's quite the opposite.
A Bullish Case for Natural Gas
Now, both factors I mentioned above (volume in the market and the weather) are expected to provide an improving environment for rising prices.
In addition, drawdowns are increasing from storage, another factor that should stimulate market price, and exports of both pipelined and liquefied volume are up more than 20% year on year.
In fact, according to the EIA, aggregate weekly figures for national demand have been sitting above a nine-year average since late February.
We also have to consider that takes longer to factor in the impact on supply from actual changes in drilling.
And there are two overriding reasons why.
First, at least 80% to 85% of natural gas drilling expenses are front-loaded.
An operating company has already spent the bulk of its funds before anything comes out of the ground.
Bottom-line considerations oblige that the volume moves into the market to defray expenses even if the price is declining.
Second, primary production flow – especially from shale and tight gas formations – occurs in the first 18 months.
Thereafter, a reduced but continuing flow still takes place. That assumes the company decides not to re-frack wells.
Both take place because recovery of investment needs to occur virtually regardless of the market pricing that exists.
But there is another piece of the puzzle we have to factor in: liquefied natural gas (LNG) exports.
New LNG demand is emerging across the board.
We're talking about everything from LNG export consignments, electricity, industrial use, and vehicle fuel, all of which points toward an uptick in demand moving forward.
And right now, there is one country in particular that is proving even hungrier for U.S. LNG than expected…
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.