US natural gas prices have fallen by almost 50% in the past year to just over $2 per million British thermal units (mBtu) a ten-year low. Gas production hit a record high in America last year, eclipsing the previous peak in 1973. That was due to new drilling techniques that have allowed explorers to tap hitherto inaccessible deposits.
Inventories are at record highs for this time of year, says Dan Strumpf in Barron's. Heating demand was lacklustre in the winter because of unusually warm weather and it is now falling further with the onset of spring. "Gas inventories will only keep rising from here", which suggests America could run out of room to store natural gas as early as October.
Some companies are planning to reduce output now that prices have fallen so far. But according to Michael Zenker of Barclays Capital, the plans of the top 20 producers still point to a 3% supply increase this year.
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Many drilling rigs have moved from wells that yield only gas to ones that offer a mixture of gas, oil and liquids used in petrochemical production, says Javier Blas in the FT. The incentive is high prices for oil and liquids; gas is a byproduct of these wells.
A gradual shift by power plants from coal to gas should shore up demand and prices longer term, says Strumpf. But for now, prices could fall further.
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