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Natural gas, self-correcting [ClearOnMoney]
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Commentary

Natural gas, self-correcting

14 Jan 2012 by Jim Fickett.

Despite the idea you might get from newspaper headlines, natural gas drilling in the US is in a declining trend, and the months' worth of gas in storage, at current demand rates, is well below average and also declining.

In the last few days both newspapers and commodities traders have made much of mild winter weather that has reduced, in the short term, demand for natural gas. So the price is once again very low.

US natural gas prices suffered their biggest week drop in two-and-a-half years, falling 12.7 per cent, amid forecasts of continuing mild winter weather and booming US production.

Higher than normal temperatures in the east and Midwest of America have depressed US natural gas prices over the past few months, when consumption is supposed to be at its strongest. “There doesn’t seem to be a floor [to the price] right now,” said Laurent Key, natural gas analyst at Société Générale in New York.

But this is a short-term data blip combined with a preconceived notion of a glut. In reality, despite much talk of a continued rush into shale gas drilling, actual drilling is in a declining trend, according to data on the number of rigs in use, gathered by drilling services company Baker-Hughes:

And according to data from the US Energy Information Administration (storage and demand) through October, the amount of gas in storage, relative to demand, continues to decline:

(Because gas use is highly seasonal, this is a running 12-month average of gas in storage, divided by a running 12-month average of gas demand, giving a smoothed measure of how many months gas in storage would last at current usage rates.)