Search International Hotels
Natural gas prices are falling near levels last seen in the 1990s, which could help spur the US to develop more uses for the fuel, including transportation.Getty ImagesThe collapse in natural gas prices to decade lows amid record supplies have changed the dynamic of the energy industry.
Natural gas is already displacing coal in power generation, driving coal’s share to the lowest level since the 1970s, and promises to drive it even lower. And there's more talk now that it could replace some gasoline in transportation.
But for now, natural gas is being overproduced across the country, as companies extract shale gas in 32 states and off shore. In just a few short years, the shale gas industry has turned the U.S. from a potential importer of natural gas to a potential major exporter.
This abundance of supply and an unusually warm winter combined to create a record amount of natural gas in storage for this time of year. The latest weekly inventory data is released Thursday at 10:30 a.m. ET by the EIA.
“We are right now at 2.38 trillion cubic feet. It’s a record for this time of year, and it’s 55 percent above the five-year average,” said John Kilduff of Again Capital.
“April historically sees the start of natural gas injection, or the build in inventories, but this year it started in March,” Kilduff said. The injection period typically runs to Nov. 1, when gas starts to get drawn down for heating.
Natural gas futures finished at 2.19 per million BTUs on the NYMEX, down 3.7 percent for the week and down 27 percent since Jan. 1. Natural gas is now trading at levels last seen in February, 2002.
“We’re going to see an injection of 40 bcf (billion cubic feet) tomorrow… and we saw an injection last week. It’s unusual. Usually in March, we see the last of the withdrawals,” Kilduff said.
Kilduff said he expects gas to break through $2 in the near future, and his next target is $1.82 per million BTUs. But it could certainly fall into the $1.60s level, last seen in the late 1990s, he said.
Natural gas prices could rise “if companies were to aggressively shut in supply, if we get some early cooling demand or if for some reason there was to be some unusual amount of nuclear power plant maintenance that that too would push the potential to get some electricity demand on that would be natural gas fired,” he said.
Many in the industry expect to see low single digit prices for natural gas into the foreseeable future, with the price eventually getting back towards $3 to $4.
“I think it’s hard to say what the level will be but we’re certainly in a long period of low natural gas prices, given the volumes, given demand. And that’s why this discussion about natural gas and transportation is a lot more serious now than it was a year ago,” said Daniel Yergin, CEO of IHS/CERA.
Both Chrysler and General Motors [GM Loading... () ] recently announced natural gas fueled pickup trucks, and Shell Oil [RDS.A Loading... () ] has said it would test some natural gas fueling stations in Canada.
“We’re seeing more companies pledge to accelerate their shift into liquid or oil production. There have been natural gas curtailments, but it hasn’t’ been enough to move prices,” said Michael Zenker, managing director, commodities research at Barclays.
“Prices are likely to continue to soften this year—how low they go is anyone’s guess—sub $1 price is certainly possible, but not necessarily likely,” said Zenker.
Barclays expects prices to average $3.25 per million BTUs in 2013. “Most of the upside in prices comes in a cutback in drilling, slowdown in production and we’re factoring in normal winter weather conditions, which should help reset the imbalance,” he said.
The drop in prices is also causing pain in the industry. Companies, like oil field services company Baker Hughes [BHI Loading... () ] and Schlumberger [SLB Loading... () ], are feeling it on the bottom line. Baker Hughes this week said it is cutting costs after warning last week that it was being hurt by the shift to oil from natural gas basins.
“I think the large companies have the staying power to get through it and look to the other side of the valley,” said Yergin. “Independents have depended on hedging. That’s been critical to their ability to survive this.”
“If you have low prices at this level, it will eventually provoke a shakeout in the industry,” he said.
Follow Patti Domm on Twitter: @pattidomm
Questions? Comments? Email us at
© 2012 CNBC.com