Following a three-week rally that surrounded the New Year, the natural gas market has retreated yet again, leaving prices across the forward curve historically depressed. A combination of stubbornly-high domestic production, near-record February natural gas storage inventories, and lackluster heating demand has weighed significantly on the market. Even several intense cold snaps in the populous eastern half of the country proved insufficient to fuel upward market sentiment, given the overall context of an otherwise bearish winter season.
In mid-February, natural gas deliverable throughout the coming summer season (April through October) plunged below $2.05 per MMBtu, breaching that NYMEX strip&rsquo;s previous life-of-trading low set in December. The last time that summer natural gas settlements have been anywhere near as low was in 1998, when summer contract settlements averaged $2.08 per MMBtu. The low pricing goes beyond the immediate term; natural gas deliverable over winter 2016-17 (November through March) dipped below $2.50 per MMBtu, the lowest offering for winter natural gas so far in advance this century.
Indeed, pricing all the way across the NYMEX forward curve is historically low. As of Feb. 22, the first delivery that was priced over $3 per MMBtu is in January 2021. The five-year strip has been at sub-$3 levels since the beginning of the year&mdash;pricing that has never occurred since the futures market was extended beyond 36 months in 2001. It is safe to say that the current environment represents the lowest long-term price environment on record.
Behind the scenes of the bearish winter market, evidence of fundamental tightening can be found. Low pricing has led to a change in behavior in two major segments of the U.S. natural gas market, which could have implications throughout the rest of 2016. Production companies have scaled back drilling operations considerably over the past 14 months as futures pricing has trended lower. The Baker Hughes natural gas-directed rig count, which measures exploration for new wells, has been reduced by more than two-thirds since the beginning of 2015 to the lowest level ever just above 100 rigs. So far, this has not led to a material decline in production, as increased rig productivity and impressive ongoing output from existing wells has kept volumes afloat. However, output is no longer growing at anywhere close to the rate that was experienced in 2014 and 2015, and volumes are expected to be flat to slightly lower in 2016.
The power generation sector has responded to low pricing by ramping up consumption. Demand from this sector so far in 2016 has outpace year-ago levels significantly, with natural gas favored over coal in the generation mix. This is especially impressive considering weather-related energy demand is down considerably, and could be an indication that demand from this sector is in position to build on the already-record levels established in 2015. This is the sector that is in best position to respond quickly and effectively to low prices and help rebalance the oversupplied market.
Some say that low prices are the best cure for low prices. As the market moves past the bearish nature of the immediate term, this axiom will be put to the test as we see whether or not a meaningful recovery is in the cards for natural gas in 2016.
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Natural Gas Prices ($/MMBtu)
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LOCATION
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February 19, 2016
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November 30, 2015
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February 18, 2015
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NYMEX
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1.80
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2.34
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2.831
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NNG Ventura
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1.77
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2.37
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4.92
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Calif. Citygate
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1.9
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2.75
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2.83
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2016/02/U_1456516078794_thumb.

2016/02/U_1456516078794.

Following a three-week rally that surrounded the New Year, the natural gas market has retreated yet again, leaving prices across the forward curve historically depressed. 

Commodities: Forward natural gas pricing hits new lows

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