Natural Gas Price Forecast - October 19

[dan_s]

Go to this link and look at the history of natural gas prices in the U.S. market: http://www.macrotrends.net/2478/natural ... ical-chart

One comment that I frequently get is that "I looked at the NYMEX strip for natural gas and it shows first quarter contracts trading at just a bit more than where the price is today. Why do you think the price of gas might go higher this winter?"

The NYMEX strip is not a forecast and it is not a good indicator of where commodity prices will be in the future. NYMEX futures contracts are like Call options on stocks. They give the buyer the right to take delivery of a certain amount of physical gas at a certain price. Just like Calls on stocks, they are derivatives that go up and down over time as new information comes out about the physical gas market. They are a paper trade that "derives" its value from another asset.

Now take a hard look at the chart at the link above. Over the last 20 years, the price of natural gas has traded over $14/MMBTU four times. The abundance of gas supply caused by the shale gas "revolution" (due to horizontal drilling and advancement in fracking technology) probably will keep gas prices below $14 for a long time. However, that does not mean there won't be price spikes. In January, 2014 the gas price spiked to over $6.00. It actually averaged $5.32 for the month of January. Prior to that price spike less than four years ago and every other spike on that chart, a few months before the spike the NYMEX strip gave no indication of prices moving that high.

Oil and gas price spikes happen when there is unexpected tightness in the physical market. For natural gas, it is when the utility companies start to worry about having enough gas to meet the demand of their customers.

I believe the physical natural gas market is much tighter than most people think it is.
1. U.S. naturals gas production declined from 2015 to 2016.
2. It continued to decline year-over-year in the first five months of 2017 and we are probably on-track for a YOY decline.
3. Demand for natural gas has increased by 2.5 to 3.0 BCF per day this year thanks to increasing exports and industrial demand. Demand for power generation is actually down slightly YOY.
4. The real proof of a tighter gas market is that over the last 31 weeks (the "refill season") the delta to the 5-year average storage builds is -450 BCF.

Back to January, 2014: In December, 2013 a cold start to winter pushed natural gas storage levels 200 BCF below the 5-year average.

Today EIA Storage Report: Natural gas in U.S. storage was 35 BCF below the 5-year average on 10/13/2017 and my prediction is that by mid-November storage will be 100 BCF below the 5-year average. November is shaping up to be colder than normal. There is a strong "La Nina" in the Pacific (the water is cooler than normal). La Nina winters are usually colder than normal in the Great Lakes Region with more snow than normal. The states that burn the most natural gas for space heating are in the Great Lakes Region.

Start your own due diligence by going here http://www.americanoilman.com/ and clicking on "Gas Storage".

There is no guarantee this will be a 2013/2014 winter, but it sure is starting off at a good place.