American natural gas prices have been treading water for two years now, fluctuating around $4m metric British thermal units (MMBtu). This week they fell to $3.43 MMBtu. The broader trend looks unlikely to change any time soon. On the one hand, industrial demand has been tepid due to the lacklustre economy, while unusually warm weather has lowered household demand. Production, however, has continued to rise, bolstered by new drilling techniques that have allowed explorers to tap gas in dense rock formations. The Energy Information Administration expects gas output to expand by 6% to a new record this year.
All this has increased gas inventories to a fraction below last year’s record November peak. That benchmark seems certain to be exceeded this month and a record spring inventory level is now a distinct possibility, says Deutsche Bank. Judging by the number of rigs still coming to market, production will keep rising, adds Barclays Capital. Meanwhile, a lack of plant capacity will keep industrial demand growth subdued. The upshot is that prices are capped at around these levels. Expect gas prices to average $3.80 MMBtu in 2012, says Barclays Capital.