The Other Energy Bust—-Natural Gas Prices Fall To All-Time Inflation-Adjusted Low

By Timothy Puko

Natural-gas fell to the lowest ever inflation-adjusted price in its history of Nymex trading on Wednesday as extremely warm weather continues to limit demand.

Prices for the front-month January contract settled down 3.2 cents, or 1.8%, at $1.79 a million British thermal units on the New York Mercantile Exchange. That is the lowest settlement since March 24, 1999.

Gas prices have been falling precipitously in recent weeks because of the combination of record-high stockpiles and a December that could be the worst for heating demand in history. Prices have fallen 25% in just one month and have dropped 39% from their high in August. Wednesday settlement put gas below the inflation-adjusted low of $1.801 that had been in place since January 1992.

Gas did make a move up to small gains in after-hours trading, but many traders and brokers had little explanation for that rebound. The trader Marc Kerrest said he noticed prices and spreads moving higher for months far away, a sign front-month prices could follow. He closed out some of his bearish bets before settlement, he said.

“But in no way would I consider going [bullish on] gas just because of what it’s done,” in recent weeks, said Mr. Kerrest, who manages his own gas-focused fund, Cornice Trading LLC.

Warm weather in the U.S. caused by the El Niño weather phenomenon has sharply limited demand for the heating fuel this year. The natural-gas market is oversupplied, and some traders and analysts say the industry could run out of storage space for gas by mid-2016.

Production was so high and demand was so soft that storage levels likely shrank by just 41 billion cubic feet last week, according to the average forecast of 17 analysts, brokers and traders surveyed by The Wall Street Journal. That is only a third of their five-year average drawdown for the week. If the forecast is correct, stockpiles on Dec. 11 would have been 16% above levels from a year ago and 8.9% above the five-year average for the same week.

Forecasts called for even warmer weather. MDA Weather Services and Commodity Weather Group show temperatures more than 15 degrees Fahrenheit above normal that had been forecast for the Great Lakes region next week now spreading to cover nearly the entire East Coast and the South from Atlanta to San Antonio. Commodity Weather Group has been predicting a high of 70 degrees for New York on Christmas Eve.

With weather so warm and prices already so low, there may be no lower price to which gas can fall to draw more demand, said Scott Shelton, broker at ICAP PLC. That means prices have to fall so far that producers stop working.

But many have been caught in a cycle of debt, forced to keep producing even at a loss just to bring new revenue in the door that they can use to pay the debt bills that piled up from using loans to fuel their growth during the drilling boom. It isn’t clear how far prices would have to fall to get them to stop, Mr. Shelton said.

“This market is in real trouble,” Mr. Shelton said. “Just wait for the bankruptcies.”


Source: Natural Gas Falls to All-Time Inflation-Adjusted Low – The Wall Street Journal