Natural gas price heads lower

While oil keeps hitting new highs, natural gas prices are heading south. With US futures having hit a seven-year low under $3 per million British thermal units (mBtu), down almost 50% this year, the price ratio of oil to gas has reached over 26 to 1. That's the highest since gas futures began trading in 1990 and a far cry from the long-term average of around 13 to one.

Yet the odds of gas closing the gap rapidly are slim. North America is "choking on the stuff", says Lex in the FT. The recession has hit demand, especially from industry, and a rapid recovery is unlikely. According to the Energy Information Administration, US consumption will fall by 2.3% in 2009 and stay flat next year.

Domestic inventories have swelled to record levels for this time of year in some areas storage is already close to capacity, yet the beginning of the heating season is still two months away.

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Supply has boomed due to continual recent discoveries of gas beneath shales, which has also reduced the proportion of supply provided by the Gulf of Mexico. That means hurricanes are less of a worry for supply.

Although explorers are beginning to cut back production, this isn't happening fast enough to bring supply and demand back into balance, says Marshall Adkins of Raymond James. No wonder energy research group Simmons & Co. reckons prices could fall as low as $2.25 mBtu.