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Natural Gas Prices At Highest Level In Two Years

Natural Gas Installation

Amid all the headlines about Donald Trump and OPEC, very few news outlets noticed the remarkable increase in natural gas prices in November. Gas futures for front month delivery gained more than 34 percent over the past month, rising to their highest level in two years.

Bouncing around at roughly $3.50 per MMBtu, natural gas prices are also up more than 100 percent since hitting a low point earlier this year. There are several reasons and trends underlying the price gains, so let’s go through a few of them.

 

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First, natural gas production hit a peak earlier this year and fell back roughly 5 percent. Gas producers posted impressive gains without much of an interruption for the better part of the past decade, even as spot prices dropped below $3/MMBtu and at times below $2/MMBtu.

But the gains in output really came to a halt when the rig count across the country began to plunge in 2014 as oil prices melted down. The gas rig count had been falling for years, but as companies stopped drilling for oil, the gas that is found in association with oil stopped flowing. Gross withdrawals of gas peaked earlier this year at just over 90 billion cubic feet per day, and have posted consistent monthly declines until recently.

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At the same time that supply ground to a halt and began to fall back, demand continues to rise. Demand is highly seasonal, spiking in winter months and dropping during spring and fall, with smaller spikes in the summer. The winter high points have been getting higher, and the summer lows have also been getting higher. Much of that has to do with the sharp rise in the consumption of gas for electric power. As coal plants shut down, utilities are leaning on their existing gas-fired power plants more, and also construction new ones. Related: $3 Billion In 3 Hours: Energy Mogul Hamm Cashes In On OPEC Deal

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Natural gas is expected to make up a larger share of total U.S. electricity generation than coal for the first time ever. The shuttering of coal plants and the construction of new natural gas plants will lock in gas demand for years – and likely, decades – to come.

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In recent years, rising gas production was more than enough to meet the stronger demand from power plants. As recently as 2015 the market became flooded with too much gas, which led to record levels of storage. In the summer of 2015, storage levels were running at about average, but the mild winter last year caused demand to drop unusually low, allowing storage levels to fill up. Prices as a result, crashed. Exiting the winter months, everyone expected the record high inventory levels to keep prices low for years. But, as mentioned above, production from drillers suddenly stopped rising. As a result, storage levels are converging right back towards the five-year average much quicker than many expected. It is not a coincidence that prices have climbed over the same time period. Related: U.S. Oil Rig Count Climbs To A 10-Month High

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The recent OPEC deal complicates this picture. Before the deal to cut output, oil prices were expected to remain more or less where they are – the EIA projected WTI to average just under $50 per barrel through 2017. But the sharp increases in prices in recent days, and the prospect of further gains for crude in the months ahead, likely means that shale drillers will rush back to work. That will probably lead to a rebound in oil production sooner rather than later – and a likely side effect of that will be a rise in natural gas production.

“These guys will drill more, and you are going to get that extra gas at an inconvenient time,” Jason Schenker, president of Prestige Economics LLC, told Bloomberg in an interview. “It’s bearish for U.S. gas for the next three- to nine-month window.”

That remains to be seen. In the short run, due to a tightening of supply and demand, we could see natural gas prices consistently trading north of $3/MMBtu for the first time in more than two years.

By Nick Cunningham of Oilprice.com

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