Natural gas prices continue to plummet. Today, Feb 21, prices have dropped 27 cents down to $2.57/MMBtu. The reason is simple. We haven’t used as much gas as investors expected. The positive way of looking at this is that we’re still a dollar higher than we were this time last year, and we have less gas in storage than we did this time last year. Andrew Hecht over at Seeking Alpha thinks that there is reason to believe that prices will be pretty volatile in the next few weeks.
What will really be interesting is to watch the rig count in the Utica/Marcellus area. Prices below $3.00/MMBtu will discourage new drilling. Producers have been ramping up drilling in the last six months or so. It will be interesting to see how quickly they slow drilling down.
Oil prices are doing well, which is unfortunate for natural gas prices. Oil production will continue to climb, and the gas produced with oil will compete with our Marcellus/Utica wells, keeping prices and development down.
RB Energy did an excellent breakdown of why natural gas prices have dropped so much and how the market compares to last year and the five year average. Most of you don’t have a subscription to RB Energy, so here’s a very condensed summary: this winter hasn’t been cold enough. That’s really it. Production has been picking up a little, but not enough to make the difference. Storage levels aren’t ridiculously high. If you plug in last year’s winter weather into this year’s winter weather you end up with very low storage levels and, consequently, higher natural gas prices. It’s that simple.
Oil prices remain above $50.00/bbl. In fact, it’s better to say they are around $55/bbl. The main cause is the production cut set in place by OPEC in November. OPEC has said they have about 70% compliance with the agreement. Pretty impressive, especially considering past performance. More importantly, the non-OPEC countries that agreed to cut production were at about 66% compliance.
U.S. oil drillers, however, have increased production since last summer. That increase is not as much as the decrease by OPEC, but you can bet there is a lot more U.S. production planned in the very near future.
Sorry for the late and short nature of this post. I’ve been sick again this week.