This Big Red Bar Explains Why Natural Gas Prices Are Plummeting

Natural gas prices have fallen to their lowest levels in 10 years.  Traders who have been long natural gas have been feeling the heat.

But it has in fact been warmer than usual for all of us.  This is bad news for the natural gas companies who would hope we’d crank up our natural gas heaters each winter.

Last week, Citi’s Robert Morris slashed his 2012 natural gas price target to $3.25/MMBtu from $3.85/MMBtu.

Among other things, he notes that we’re experiencing one of the warmest winters in a decade.  Here’s some of what he had to say:

Temperatures winter-to-date (November 1st through January 5th) have now been ~10% warmer-than-normal (i.e., 10-year average), with November, December and the first week of January accounting for ~41% of a normal winter’s total customer-weighted gas-home heating degree days (HDDs). Consequently, last week ended with a 356 Bcf year-over-year storage surplus. We estimate that if temperatures for the remainder of this winter just match the 10-year average, then the full winter would end up ~4% warmer than-normal. However, most forecasts are calling for continued mild temperatures through February. Meanwhile, last winter was ~6% colder-than-normal. The unusually warm progression of this winter has resulted in ~3.2 Bcf/d lower demand in the residential and commercial sectors through the end of December versus a normal winter…

That brings us to Chart 2 in his report.  It captures winter temperatures as measured in heating degree days (HDDs).  The baseline represents the 10-year average.  As you can see from the 2011-2012 winter-to-date, it has been 9.6% warmer than usual.


[credit provider=”Citi Investment Research & Analysis”]

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