U.S. natural gas futures ended down sharply on Tuesday, their sixth straight session loss, as mild winter weather and record high supplies knocked prices to levels seen only twice in the last 10 years.
Prices have dropped 18.7 per cent in the last six sessions, the steepest six-day drop in nearly 4-1/2 years. At the same time strong volume and record high open interest indicate that traders are starting to pile in with bearish bets.
While last week's drop in the gas rig count and reports some producers were cutting back budgets for gas drilling could eventually tighten supplies, most analysts agree there was little on the horizon that could stem the bearish tide.
"The rig count is falling, but production is still strong, and the (growing) inventory surplus to last year and the five-year average is also weighing heavily on the market," said Eric Bickel, analyst at Summit Energy in Kentucky.
Front-month gas futures on the New York Mercantile Exchange slid 18.2 cents, or nearly 7 per cent, to settle at $2.488 (U.S.) per million British thermal units after sinking early to $2.439, just above the September 2009 low at $2.409.
A break below that benchmark would drive prices to levels not seen since March 2002.
Unusually mild weather this winter has created an oversupply by cutting heating demand for homes and businesses. Forecasts through January, typically the coldest month of the year, show no change in that trend.
"The (11-15 day) forecast remains quite warm through this period as well, with little sign of any major cold upcoming," private forecaster MDA EarthSat said in its morning report.
While the front month is technically very oversold – the 14 day relative strength index is hovering at a 17-month low of about 13 – and could bounce if short sellers decide to take profits, there is little on the fundamental side to sustain a rally.
STORAGE, A PROBLEM FOR HIGHER PRICES
Gas prices have been weighed down for the past year by record high gas production, primarily from shale, which helped drive prices down 32 per cent last year and another 17 per cent so far this year.
While low prices should eventually discourage new output as producers shift spending from dry gas to more-profitable oil or gas-liquids prospects, there is little or no evidence so far that gas output is about to slow.
Drilling data last week from Baker Hughes showing the gas-directed rig count slipped below 800 for the first time in two years stirred talk that low prices were beginning to take a toll on profits and could finally lead to a slowdown in production.
But analysts note that there is still plenty of associated gas that flows even as producers chase higher-value natural gas liquids (NGL) like butane and propane. Most do not expect any major slowdown in dry gas output until later this year at the earliest.
"Producers are on a longer leash due to high NGL prices," said Katherine Spector, head of energy strategy at CIBC World Markets in New York, noting liquids-rich gas can add several dollars per mmBtu to the value of overall output.
Recent government data still estimates that 2012 domestic gas production will hit a record high for a second year.
U.S. natural gas inventories paint an even more bearish picture, with data showing storage running at 13 per cent above last year and 17 per cent above the five-year average, a huge cushion that is likely to grow further unless some extremely cold weather arrives to help burn off some of the excess gas.
Storage started the heating season at record highs and the lack of demand this winter could leave stocks at a record at the end of the season, raising concerns that inventories will test the limits of capacity before next November and drive prices even lower as sellers struggle to find places to put gas.
"Weather forecasts keep indicating that surplus levels are likely to continue to build at least into early February," Summit Energy's Bickel said, noting forecasts were calling for fairly mild weather for most of the nation for the next two weeks which should translate into sluggish demand.
Analysts recently have been revising upward their estimates for end-winter inventories after mild weather in November and December seriously slowed withdrawals.
Recent estimates range from 2 trillion cubic feet to 2.4 tcf. Inventories usually end the heating season at 1.55 tcf. The record high for end-winter storage is 2.148 tcf set in 1983.
"The question becomes might we see a scenario that storage is rejected due to a lack of capacity? That would be brutal for the cash market," CIBC's Spector said.
Estimates for demonstrated peak U.S. working gas storage capacity are in the 4.1-4.2 tcf area.
More fuel switching by utilities and industry from costlier fuels such as oil and coal to gas could eventually yield more demand and restore some balance to the market.
Tighter environmental rules on emissions this year should also favor gas, a less polluting fossil fuel, but most analysts agree these changes will take some time.