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Unseasonably Warm Winter Has Chilling Effect on Price of Natural Gas

Gas Surplus Leads to Plummeting Prices

Written by Nathan Holl
Posted January 20, 2012 at 9:42PM

U.S. natural gas prices plummeted this week, dropping 85 percent from their all time high reached in 2005.

The drop reflects the decreased demand for heating fuel in U.S. markets.

An unseasonably warm winter has reduced the nation's dependence on natural gas and supply has sky rocketed  in response.

According to the San Francisco Chronicle, rising output has resulted in a huge surplus. 

Stocks were 539 billion cubic feet higher than they were this time last year and 566 billion cubic feet above the five-year average of 2.724 trillion cubic feet.

For the first time since 2002, prices for natural gas could drop below $2 per million Btu as a result of the increasingly rising output.

Natural gas prices have already plunged nearly 34 percent since the beginning of December and prices in January are 50 percent lower then they were at this same time last year. 

Cindy Wexler, an independent gas trader on the floor of the New York Mercantile exchange said:

It looks pretty bad right now, it’s going to take some time to undo this supply situation and that’s going to pressure prices.”

Unfortunately time is of the essence for natural gas storage facilities around the country.

If demand does not increase, storage facilities might be forced to release gas into the atmosphere in order to maintain operational integrity.  Such actions would have devastating effects on natural gas prices in the upcoming months.

The upcoming week indicates the situation can only get worse.

The coldest portion of winter has already passed by and the Industry Weather Group is calling for above average to well above average weather for the week ahead.

Energy companies are taking steps to mitigate the long-term negative effects the warm temperatures and rising surplus will have on long-term natural gas prices.

Production budgets across the industry have been cut by 10-15 percent.

Talisman Energy Inc. (NYSE: TLM), an energy producer based in Calgary with operations in the U.S., has cut spending on drilling by $500 million as a result of the decline in North American prices.

The growing output and associated storage problems have caused Goldman Sachs (NYSE: GS), Deutsche Bank (NYSE: DB) and Bank of America (NYSE: BAC) to cut their price forecasts for natural gas in 2012.

According to the Energy Department’s Office of Fossil Energy, one possible solution to the storage problem put forth by the natural gas companies is to export up to 14 billion cubic feet per day, equating to about 20 percent of all natural gas production.

The only problem?

The exportation of the gas to foreign markets could cause an increase in domestic prices thus decreasing the already diminished demand for heating fuels.

Until Next Time

Nate

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