Natural gas declined for a second day in New York as Citigroup Inc. cut its forecasts for this year and the next by more than 20 percent, citing rising production.
Futures for next-month delivery fell as much as 1.8 percent on the New York Mercantile Exchange after gaining earlier today. U.S. gas production grew by about 3 billion cubic feet a day from August to December and output is expected to expand by more than 4 billion cubic feet a day this year, Citigroup analysts including Anthony Yuen said in a report e-mailed today.
Daily Henry Hub gas prices will drop to an average of $2.70 per million British thermal units this year, down from a previous forecast for $3.70, Citigroup said. The bank also cut its 2016 forecast to $3 per million Btu from an earlier estimate of $4.20, according to the report.
“The key reason for such a bearish price shift is the phenomenal growth of production,” Yuen said in the report. “The growth momentum of production would likely continue in 2015 before effectively stalling in 2016.”
Gas for February delivery fell as low as $2.83 per million Btu on Nymex before trading at $2.836 by 5:12 a.m. New York time. Prices gained as much as 2.4 percent earlier today. The volume of all futures traded was 8.6 percent below the 100-day average for this time of day.
Prices dropped below $3 per million British thermal units for the first time since 2012 at the end of last month on speculation that record production will overwhelm demand. While a wave of cold weather has tempered the slump, normal weather is forecast to return next week.
Temperatures may be mostly normal in the lower 48 states from Jan. 15 through Jan. 19 after a polar blast this week, according to Commodity Weather Group LLC in Bethesda, Maryland. About 49 percent of U.S. households use gas for heating, according to the Energy Information Administration, the Energy Department’s statistical arm.
U.S. gas production may advance 5.5 percent this year to a record 74.26 billion cubic feet a day, the government said Dec. 9 in its monthly Short-Term Energy Outlook report. Output from the Marcellus shale formation in the Northeast may rise to 16.3 billion cubic feet a day in January, up 19 percent from a year earlier, the EIA said Dec. 8 in its monthly Drilling Productivity Report.
“Producers need to cut capex substantially and curtail production,” Yuen said. “For gas inventories to stay within the storage threshold of around 4,000 billion cubic feet in both 2015 and 2016, prices would have to fall to induce more coal-gas switching, the sector that is most sensitive to prices.”
Raymond James & Associates cut its forecast for average 2015 Henry Hub gas prices to $3 per thousand cubic feet from $3.65, citing normal weather that will “unmask the bearish underpinning of the U.S. gas market,” J. Marshall Adkins, an analyst at the company in Houston, said in a note to clients yesterday.
The gas market “looks terrible” for 2015 and “has been structurally oversupplied for years,” Adkins said.