Betting on Natural Gas Futures Prices

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Which will we see first for the Prompt Month Contract of Henry Hub Gas Futures?  $3 or $3.60 NYMEX…

We haven’t been outside of this range since December 7 when the January contract closed at $3.68. On the downside, it hasn’t been below the range since September 25^th at $2.92 per MMBtu.  But many are hoping for a repeat of 2012 when the prompt broke $2 and the 12-month strip was below $2.60.

Have you placed your bets? Well, the chances for a repeat of 2012 appear to be quite slim. Last year boasted the warmest winter of the 20^th and 21^st centuries!  And shale producers kept drilling even as prices plummeted, which led to a huge natural gas storage surplus as inventories were 88% above the previous year. By April, the result was the lowest prices in 10 years!

What happened?

1. We had a hot summer and colder winter than a year ago, albeit still warmer than normal.
2. The market has learned about its lower bound. As prices fell in January 2012, producers announced cuts in capital expenditures on new gas production. Drilling shifted from dry gas production to wet gas as well as oil. In addition, we had coal-to-gas switching as gas-fired generation increased to work off the huge storage surplus. The market reacted slowly, but this year suppliers and generators are ready, which will likely prevent prices from falling to the lows of April. Conversely, if prices rise too much we will see producer activity increase quickly and generation will switch right back to coal. The increased supply and reduced demand will increase storage quickly, thereby giving a downward price signal.

The results? I like my chances on $3 to $3.60. Eventually, coal retirements and liquefied natural gas exports should push prices higher, but neither of those will impact the next six months. And shale drilling activity is certainly unpredictable because it is still relatively new.

I’m not a betting man though, so you might have to look elsewhere to make your wager.