Natural Gas Prices Reflecting Fears of Production and Colder Weather

Moderating temperatures seemed to the theme on Friday as both physical natural gas prices and natural gas NYMEX futures prices fell. Analysts are already looking at next Thursday's storage injection report.

Preliminary estimates indicate an injection in the range of 40-55 Bcf. Inventories are already at record levels, so injections should really be somewhat irrelevant but that isn't proving to be the case. According to Baker Hughes, the natural gas drilling rig has risen by four to 725.  As the rig count has continually climbed each week over the past several months, it now appears that the bottom is in.

“What's important for buyers to understand is that natural gas production numbers lag the rig count numbers.  Thus, even though the rig count is climbing, production numbers are expected to decline through the end of the year,” says Valerie Wood, President of Energy Solutions, Inc.  “In fact, production numbers can lag the rig count by anywhere from 2 months to 6 months.  That is why some analysts expect some major production declines to ultimately show up in the Energy Information Administration production data toward year-end.”

The million-dollar question is how big will those production declines be?  Forward-looking price forecasts for calendar year 2010 range from $5.50 - $7.50 per MMBtu.  “We don’t think declines are going to be as large as some are predicting, and as a result, we don’t expect natural gas prices to rebound substantially in 2010,” says Wood.  “Our outlook for natural gas prices falls more toward the lower end of this price prediction range.”

On top of the anticipation of larger production declines, there are also numerous forecasts calling for very extreme cold temperatures this winter.  “These forecasts are helping to provide price support right now, but it is way too early in the season to really make a call on what winter is going to look like,” says Wood. 

“Everyone seems to have forgotten about how inaccurate many of the hurricane forecasts were this past summer, but that is simply how the market reacts heading into the winter season.”

In its November edition of The Advisor, Wood will explain why the current rally in natural gas prices will ultimately fade.  In addition to identifying a number of fundamentals that support lower prices, Wood explains how technicals point to lower prices within the next 2-3 months.  Request a complimentary copy of the November edition of The Advisor by sending your request to request-oct-pr24@energysolutionsinc.com or call (608) 848-9589.

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About Energy Solutions, Inc.

Formed in 1996, Energy Solutions, Inc. is independently owned. With more than 25 years of experience in the natural gas industry, our team focuses on natural gas prices and in helping businesses improve their internal processes for the purchase of natural gas.