Why Cheap Natural Gas Could Be Here to Stay

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While everyone is watching oil prices bounce around at low levels, natural gas prices are also at their lowest levels in years.

Crude oil is filling up in storage tanks around the country, but natural gas follows more of a seasonal pattern. Between the warmer months of April through October, natural gas producers build up inventories. Then in the colder months, U.S. businesses and consumers burn through some of that storage to keep warm.

With the winter behind us, peak demand is over for the year. And compared to the harsh winter in 2014 that drew down inventories, U.S. natural gas inventories are now in a much stronger position. The U.S. used nearly 30 percent less natural gas this year compared to 2014. The Northeast did see a surge in consumption -- Boston was smothered under a blanket of snow for much of the winter -- but that was offset by warmer temperatures in the west. At the end of March, there was 1,470 billion cubic feet of natural gas in storage,according to the EIA, still 11 percent below the five-year average but much higher than last year.

Aside from the weather, there were several reasons the U.S. did not experience natural gas price spikes like it did in early 2014. First, new pipelines in the northeast ensured there were adequate connections. Second, natural gas production reached record levels in 2014, up 9 percent from the year before.

With production continuing at elevated levels and demand subsiding for the season, natural gas prices have cratered. Henry Hub prices are nearing $2.50 per million Btu (MMBtu), more than 40 percent below their levels from just five months ago, and near levels not seen since 2012.

That looks set to continue throughout this year as higher production edges U.S. inventories back toward the five-year average. As a result, barring ahurricane or other unexpected disaster, prices will stay near their current three-year lows for the foreseeable future.

Low natural gas prices could be here to stay. Who are the winners? Consumers and utilities that own natural gas power plants. The losers? Natural gas drillers that will fetch less revenue for their product, as well as coal mining companies and coal plant owners who will increasingly see themselves undercut by cheap gas.

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