The broad deflation across energy markets has not left natural gas prices unscathed, pushing down the cost of the fuel down to levels last seen 16 years ago. Amid a production glut consistent with the developments in the oil patch, producers continue to extract natural gas at near record rates, reflecting the pressure to maintain cash flows and avoid a potential bankruptcies. Storage levels continue to rise and demand remains soft considering warmer than average winter weather conditions. However, despite the near-term dislocation the market, natural gas prices are setting up for another rally over the longer-term especially considering the renewed interest in cleaner burner fuels and the pace of new developments which could eventually unseat petroleum as the key global energy supply.
Overproduction and New Discoveries
According to data made available by the Energy Information Administration division of the US Department of Energy, US natural gas production has continued to gradually rise over time despite falling prices falling over 60.00% from 2014 highs. The latest peak in production was recorded back in March, at 2.822 trillion cubic feet, with October printing just shy of the figure at 2.817 trillion cubic feet. Natural gas prices have fallen over -34.00% in the last 12-months, reflecting this continued growth in supply as inventory levels remain well above seasonal averages. Thanks in large part to the advances of horizontal drilling techniques, previously unrecoverable pockets of natural gas can now be tapped, adding to the growing proven reserves in the US lower 48 states.
According to the most recent statistics, the US currently boasts over 388 trillion cubic feet of natural gas reserves, among the largest in the globe. While there are currently marginal US exports of natural gas, mainly from Alaska which has been sending gas abroad for some time now, most of the glut in the lower 48 states remains sloshing around the system, keeping prices depressed. Prices are notably lower than other areas of the globe, especially regions dependent on imported energy supplies such as Asia. However, demand from the region is soft and concerns are arising that China’s insatiable appetite for energy is decelerating. Nevertheless, despite the confluence of fundamental factors and prices not far from 16-year lows, does not mean that there is no potential upside in natural gas.
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