Will Natural Gas Hit $1?

Following the recent sharp declines in natural gas prices, some might ask will this downward trend continue. In this week’s market analysis Itai Furman asks and answers will natural gas hit $1?

By Itai Furman

The slide in NG prices is primary a result of technology improvement, mainly the ability to dig horizontally that practically gave US ample supply for the next 100 year. Never the less, the last 6 month drop is impressive and seems to be more than just the long term bearish fundamentals.

For the complete natural gas market analysis see here in Trading NRG

The current problem in Gas market is the collapse of demand, but the major medium term threat is that gas storage will hit its limit capacity of around 4,100 Billion cubic feet. NG is a cyclical commodity. In the winter the storage are depleted and in the summer they are rebuild. The rate of formation is quite constant with slight increase YoY. In 2008 the formation reached 2,195, in 2009 it was 2,180, in 2010 it hit 2,225 and in 2011 summer around 2,275 billion cubic feet were formed. 2012 build up will probably be around 2,300 or so.

If we subtract this build-up from the maximum capacity we reach our “magic number” for the current winter – 1,800. If by March total gas in storage will be above this number, expected build-up will probably breach the maximum storage capacity. So, the million $ question is, will we reach it?

If the current depletion rate will remain for the rest of the winter, storage level will bottom down at 2,500, well over our magic number and a level that will result in a capacity breach. But, it is unlikely to believe that the winter will remain that warm. If weather will return to “normal” and the usual draw will return, we will reach 2,300, still way too high. Actually, in order to reach our 1,800 target or even to get close to it, the winter should be very, very cold and it has only 2 months to do that. This is a very unlikely scenario.