OREANDA-NEWS. November 03, 2015. NYMEX November natural gas futures contract settled at \\$2.033/MMBtu.

For comparison, the November contract closed at \\$3.649/MMBtu in 2014, \\$1.61 higher or 79 percent higher than Oct. 29. The last time the prompt-month contract closed lower than Oct. 29 was April 24, 2012 at \\$1.975/MMBtu.

So how did we get here? Why is gas trading at such a discount today? There are six key variables that, together, have played a massive role in pushing the price of natural gas to its current level:

1. Total natural gas supply

Simply put, the US has more gas to work with this year. In regards to production, 2015 has been a very strong year. Despite relatively low prices throughout the year, Platts data shows US production has averaged 72 Bcf/d year-to-date, a 3.6 Bcf/d increase from a year ago. Canadian imports are also up this year, averaging 5.4 Bcf/d this year, a 300 MMcf/d increase from a year ago. Lastly, the US has imported on average 300 MMcf/d of gas from LNG cargoes, primarily during the winter months in the Northeast. In total, the US has averaged a total supply of 77.7 Bcf/d in 2015, a 4.1 Bcf/d increase from a year ago.

2. Lower industrial demand

For all the talk about a recovering economy, the numbers for industrial demand tell a different story. Year-to-date industrial demand has averaged 20 Bcf/d, a 400 MMcf/d decline from a year ago. Declines are spread across most regions with the most significant drops in the Midcontinent, down 197 MMcf/d, where fertilizer demand continues to be weak. Other regions with notable declines have been Texas and the Southeast, down 81 MMcf/d and 65 MMcf/d, respectively.

3. Lower residential/commercial demand

Residential/commercial demand is also lagging, down 1 Bcf/d from a year ago to average 23.9 Bcf/d, mainly due to weather. When the US has a total gas supply increase of 4.1 Bcf/d year-over-year, these declines place significant downward pressure on prices.

4. Weather

As we enter November, this winter is shaping up to be a light one. The latest weather forecasts predict that the eastern half of the US will have above-average temperatures for the next two weeks. This is painful for natural gas prices because the Upper-Midwest and Northeast are some of the largest consumers of natural gas for heating. Cold weather, particularly in densely populated areas, will be absolutely crucial in moving prices out of today’s range.

5. Storage

Heading into winter, a key variable in determining the price of natural gas is the amount of gas in storage underground. Today the US has extraordinarily high levels of storage and is on track to set a new record on storage levels heading into withdrawal season (winter).

The most recent data from the US Energy Information Administration shows natural gas in storage at 3.877 Tcf for the week that ended Oct. 23. As a result, the US now has a 409 Bcf storage surplus compared to a year ago and a 153-Bcf surplus compared to the five-year average.

6. Infrastructure constraints

The fastest growing region for natural gas is by far the Northeast. The largest producing basin in the region, the Marcellus, which produced less than 2 Bcf/d in 2009, is now averaging 16.25 Bcf/d in 2015.

The Utica basin, underneath part of the Marcellus, began ramping up production around 2012 and is already producing almost 2 Bcf/d. Some see even the Utica as the basin with the most potential.

“A year ago, it would have been hard to imagine a more prolific play than the Marcellus. However, if the deep Utica works, it is likely to be larger than the Marcellus over time,” David Porges, chief executive of EQT, a major player in the Northeast, said in a call Monday.

With the Northeast now producing over 20 Bcf/d, the nation’s cheapest natural gas trading hubs can be found above the producing basins in the region. Cash prices on Oct. 29 at Millennium, East receipts were assessed by Platts at 99.5 cents/MMBtu, and Transco Leidy Line receipts were at \\$1.065/MMBtu. The average national average cash price for the same day was assessed by Platts at \\$2.170/MMBtu.

The Northeast Gas Association gives a great overview of the many natural gas pipeline projects taking place in the region that are expected to come online between now and 2018 and could take the gas to new markets. But as long as large amounts of production remain constrained, prices will have a hard time making significant long-term gains because of the fear of new gas supplies coming online.

Winter prices?

I invite all readers to share their thoughts on what is pushing down today’s natural gas prices, as well as put yourself out there and take a stab at where you think prices are headed. Leave a comment on what you expect will happen to prices, and we’ll be tracking the markets here.