Natural gas prices are falling near levels last seen in the 1990s, which could help spur the U.S. to develop more uses for the fuel, including transportation.
The collapse in natural gas prices to decade lows amid record supplies have changed the dynamic of the energy industry.
Natural gas is already displacing coal in power generation, driving coal’s share to the lowest level since the 1970s, and promises to drive it even lower. And there's more talk now that it could replace some gasoline in transportation.
But for now, natural gas is being overproduced across the country, as companies extract shale gas in 32 states and off shore. In just a few short years, the shale gas industry has turned the U.S. from a potential importer of natural gas to a potential major exporter .
This abundance of supply and an unusually warm winter combined to create a record amount of natural gas in storage for this time of year. The EIA reported Thursday that there is now 2.42 trillion cubic feet in storage, after an injection of 57 billion cubic feet in the past week.
The May futures contract fell to $2.165 per million BTUs Thursday morning.
"We saw a substantial injection, or increase in inventories. It's going to hasten the move below $2 and puts even $1.50 right now within the realm of possibility of being broken before Memorial Day," said John Kilduff of Again Capital.
"We may run out of available storage for production. They'll have to take extreme measures to shut in, or flare it, or practically give it away to get it moving and manage the production," said Kilduff. He said the amount in storage is about 55 percent above its five-year average.
April is historically the start of natural gas injection, or the build in inventories, but this year it began in March. The injection period typically runs to Nov. 1, when gas starts to get drawn down for heating.
Natural gas futures are down about 30 percent percent since Jan. 1, and it is now trading at levels last seen in February, 2002.
Kilduff said he expects gas to break through $2 in the near future, and his next target is $1.82 per million BTUs. But it could certainly fall into the $1.50s level, last seen in the 1990s, he said.
Natural gas prices could rise “if companies were to aggressively shut in supply, if we get some early cooling demand or if for some reason there was to be some unusual amount of nuclear power plant maintenance that that too would push the potential to get some electricity demand on that would be natural gas fired,” he said.
Many in the industry expect to see low single digit prices for natural gas into the foreseeable future, with the price eventually getting back towards $3 to $4.
“I think it’s hard to say what the level will be but we’re certainly in a long period of low natural gas prices, given the volumes, given demand. And that’s why this discussion about natural gas and transportation is a lot more serious now than it was a year ago,” said Daniel Yergin, CEO of IHS/CERA.
Both Chrysler and General Motors recently announced natural gas fueled pickup trucks, and Yergin said Shell Oil has said it would test some natural gas fueling stations in Canada.
Companies, like Chesapeake , have cut back on production but analysts say there will have to be more shut ins to stem the price decline.
“We’re seeing more companies pledge to accelerate their shift into liquid or oil production. There have been natural gas curtailments, but it hasn’t’ been enough to move prices,” said Michael Zenker, managing director, commodities research at Barclays.
“Prices are likely to continue to soften this year—how low they go is anyone’s guess—sub $1 price is certainly possible, but not necessarily likely,” said Zenker.
Barclays expects prices to average $3.25 per million BTUs in 2013. “Most of the upside in prices comes in a cutback in drilling, slowdown in production and we’re factoring in normal winter weather conditions, which should help reset the imbalance,” he said.
The drop in prices is also causing pain in the industry. Companies, like oil field services company Baker Hughes and Schlumberger , are feeling it on the bottom line. Baker Hughes this week said it is cutting costs after warning last week that it was being hurt by the shift to oil from natural gas basins.
“I think the large companies have the staying power to get through it and look to the other side of the valley,” said Yergin. “Independents have depended on hedging. That’s been critical to their ability to survive this.”
“If you have low prices at this level, it will eventually provoke a shakeout in the industry,” he said.
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