Anyone following natural gas knows prices have steadily declined over the course of three months.
Last recorded at $2.50 per million British thermal units (MMBtu), natural gas prices are reaching the lowest levels in 13 years.
So why are prices so low?
A confluence of problems has besieged the industry, undermining Wall Street’s price predictions for natural gas, and causing production companies big and small to rethink their strategies for the rest of 2012 and 2013 to see improved quarterly returns.
The first problem afflicting the industry is a glut in supply.
New technologies, like horizontal drilling and shale fracking, have made mining for natural gas easier then ever and opened up deposits considered unreachable just 5 years ago.
That’s resulted in a supply 21 percent above the five-year average.
Problem number two: this year’s unseasonably warm winter.
Gas inventories tend to fall in the winter as homes and offices crank up the thermostats burning fuel held in natural gas storage facilities.
However with January already behind us, and no indications of arctic weather on the way, consumer demand for natural gas is expected to stay low, exasperating industry supply problems.
The third problem keeping natural gas prices low is Exxon Mobil (NYSE: XOM).
In an attempt to offset the increasing supply and bring prices up, production companies have cut their rate of production.
Chesapeake Energy (NYSE: CHK), the nations second largest natural gas producer, intends to cut its current activity in dry-gas regions by half, to 24 rigs, by the second quarter.
Investors hoped Exxon would follow suit, but the company announced in its annual earnings results that it intends to keep all of its 70 rigs operational in the dry-natural gas region, effectively counseling out the attempts of its competitors.
But what’s bad for investors is great for consumers.
Analysts expect prices to remain low until there is either a drop in production, a significant demand response, or America is hit with the absent winter investors and production companies are praying for.
Until Next Time
Nate
