The Days of Cheap Natural Gas Are Over

Natural gas prices averaged a little more than $2.50 per mmBtu (million British Thermal Units) in 2016. Those days are over. Prices will average at least $3.50 to $4.00 in 2017.

Prices have more than doubled since March 2016 but gas is still under-valued. Supply is tight because demand and exports have grown and shale gas production has declined.

In April of last year, I wrote that natural gas prices should double and they did. Henry Hub spot prices increased 2 1/2 times from $1.49 to $3.70 per mmBtu and NYMEX futures prices doubled from $1.64 to $3.30 per (Figure 1).

Natural Gas Prices Have More Than Doubled Since March 2016 The Days of $2.50 Gas Are Gone
Figure 1. Natural Gas Prices Have More Than Doubled Since March 2016: The Days of $250 Gas Are Gone. Source: EIA and Labyrinth Consulting Services, Inc.

Nevertheless, gas prices are still too low. Storage was at record high levels throughout 2016 reaching 4.1 Tcf (trillion cubic feet) and 84% of working capacity in mid-December. Storage has fallen 1.1 Tcf in the last month to 61% of capacity. That is below the 5-year average (pink, dashed line in Figure 2).

Gas Storage Levels Have Fallen 1.1 Tcf To Below the 5-Year Average
Figure 2. Gas storage levels have fallen 1.1 Tcf in the last month to below the 5-year average. Source: EIA and Labyrinth Consulting Services, Inc.

Comparative inventory (C.I.) trends are the best indicators of gas price. These compare current storage to a moving average of levels for the same date over that last 5 years and correlate negatively with spot prices (Figure 3). C.I. fell 120% from May to December 2016 and gas prices doubled.

Comparative Inventories Have Fallen Sharply Since May
Figure 3. Comparative Inventories Have Fallen Sharply Since May. Source: EIA and Labyrinth Consulting Services, Inc.

There are occasional short-lived excursions from the correlation. These typically occur when the market believes there is sufficient supply for the winter heating season in September or October. The market over-shoots with lower prices that are later corrected upward.

The November 2016 price drop shown in Figure 3 is an example of this phenomenon that occurred outside of the normal September-October pattern. A similar price drop began in January 2017.

Figure 4 shows the November and January price drops as departures from comparative inventory vs. spot price trend lines.* The current trend line (May 2016 – January 2017 in red) closely resembles trends for periods when gas prices were $4.00 per mmBtu or higher (August 2011 – March 2013 in orange and March 2013 – March 2014 in purple).

Natural Gas Is Undervalued By $0.50 - $1.00-mmBtu
Figure 4. Natural Gas Is Undervalued By $0.50 – $1.00/mmBtu. Yield curves show relevant trend lines for current natural gas prices. Source: EIA and Labyrinth Consulting Services, Inc.

Recent price drops partly reflect market expectation of increased gas production in the Marcellus Shale play because of new 2017 pipeline capacity. They also suggest that the market anticipates greater tight oil and associated gas production following OPEC production cuts.

Figure 4 suggests that current gas prices are under-valued and should be at least $3.75 and probably closer to $4.00 instead of $3.27/mmBtu, last week’s average spot price.

Supply and demand fundamentals also support higher prices. Gas production has been declining since February 2016. At the same time, net imports are decreasing as pipeline and LNG exports increase.

Shale gas production is declining and conventional gas has been in terminal decline for the past 15 years. As a result, the supply surplus that has existed since December 2014 has disappeared and a supply deficit began in January (Figure 5).

Natural Gas Supply Deficit In January 2017
Figure 5. Natural Gas Supply Deficit in January 2017. Source: EIA January 2017 STEO and Labyrinth Consulting Services, Inc.

During the last supply deficit from December 2012 to November 2014, Henry Hub spot prices averaged $4.05 per mmBtu. NYMEX futures prices reached $3.93 in late December 2016 before closing at $3.20 last week. Both spot and futures prices should return to $3.75 or higher once the market recognizes the reality of tighter gas supply.

Shale gas production has declined almost 1 Bcf per day since August 2016 and all shale gas plays are in decline (Figure 6).

Shale gas production has declined 1 Bcfd since August 2016
Figure 6. Shale gas production has declined 1 Bcfd since August 2016. Source: EIA and Labyrinth Consulting Services, Inc.

Only the Marcellus and core Utica plays break even at $4 gas prices. The Marcellus has stopped growing and more pipeline capacity to better-priced markets won’t happen as quickly as some analysts believe. Although the Utica play has growth potential, it will be spread over several years and will be largely cancelled by increased exports.

Shale gas magical thinking remains strong but the paradigm of infinite, cheap supply is no longer working. There is now too much demand between power consumption and exports to keep up with declining production.

Once decline begins, it is almost impossible to turn around short of a massive drilling campaign. The requisite capital and public support are simply not there.

That means that prices will increase. Enough additional drilling will become marginally profitable to keep natural gas affordable but it is unlikely the U.S. will return to a supply surplus any time soon. The exuberant days of cheap, abundant natural gas are over.

*Developed by my colleague J. M. Bodell who has taught me everything that I know about comparative inventories.


  • Ken Johnson

    I sure hope your right!

  • Jeff G

    Thanks for the article. It seems weather has been dominating price swings in natural gas this winter. Traders have been fixated on weather headlines and when the forecasts turn cold, price spikes only to sell off once forecasts show a warming trend. It seems the media does not pay much attention to the actual production numbers which you point out in the article are in decline. From your perspective is supply (that is driven by production) the more dominate factor in the demand/supply equation than is demand (that is driven by temperatures) that can influence price swings.

  • Anonymous


    don’t you mean TCF

  • Art,

    I was wondering what might be the way to compare oil & gas prices. In particular, whether the overly simply approach of doing it simply in terms of energy content was at all relevant. From Wik, a BOE equivalent is 5.8 MBTU, and on this energy equivalence basis, natural gas is less than half oil’s price. But I’m guessing that the much richer chemical content of oil and the difficulty in transporting natural gas mean this is far too simplistic?


    • Arthur Berman


      Energy or heat content is one way to compare energy sources but there are clearly other factors like fungibility. You can put oil in a truck, on a rail car or in a tanker. Not so much with natural gas (at least without substantial liquefaction logistics and costs). Also, natural gas is not a liquid fuel so is not so useful in transport except for some fleet natural gas vehicles. Then, there are refined products that use mostly oil but not natural gas.

      These are some of the reasons oil is more valuable.

      All the best,


  • Snooky T

    Art, I have followed you since your departure from World Oil, and greatly admire the work you have done regarding the productivity and economics of shale wells. Predicting future product prices is a different animal, and a slippery slope. The few that know where oil prices are headed don’t talk about it. A background in Geology and Engineering does not make it any easier.

  • Vince

    Excellent analysis, much appreciated Art! I was looking at the commitment of traders report on oil and it shows a huge amount of commercial hedging activity at current prices. I think this may be bullish for natural gas because it seems like crude could pull back from these levels and that would be good for the supply side on natural gas. Seems like things are too bullish when it comes to oil relative to natural gas.

    • Arthur Berman


      Natural gas prices have increase a lot and producers are hedging. That pushes down the forward curve for sure but inventories drive the price in the end. Supply and demand suggest that supply will be tight for 2017. Weather will determine how tight. Either way, the floor has moved up substantially.

      There is a lot of associated gas in the Permian basin and Eagle Ford tight oil plays so increased activity will result in more gas supply. I don’t see as much interest in the Eagle Ford which is the biggest gas producer of these oil plays.

      All the best,


  • jill manfreddi

    This linked report from Timera Energy claims “the LNG market is in the earlier stages of an unprecedented ramp up in supply.”
    “Global liquefaction capacity is set to rise by more than 50% by 2022. 205 bcma (149 mtpa) of new liquefaction capacity is past the Financial Investment Division (FID) and is under construction or has come onstream since 2015.”

    • Arthur Berman


      It is hard for me to separate truth from hope in the LNG world. I have been hearing about growing liquefaction capacity since at least 2005 but LNG prices are depressed.

      All the best,


  • Tom Lampman

    Have been a fan for some time and appreciate your insights. As a resident of Alberta, I keep my eye on the oil markets and the truck traffic out to the Pembina field in the western part of the province. Lots of traffic for surface casing and Tri-Can injection haulers. General activity seems to be increasing quite so in the NW of AB and NE of BC. My neighbor just came off a frack job on an existing well with the first lateral at 5800 metres in length. Producing like gangbusters. Are producers still hurting and in need of Free Cash Flow? No rigs parked here in Nisku, AB., so they must be someplace. With the huge inventories crude and gasoline and distillates on the books currently, why so much activity. What’s happening down south? Where do you think the industry is heading, especially now that the XL has been approved? From an interested follower. Tom

    • Arthur Berman

      Thanks for your comments, Tom.

      Producers have repaired their balance sheets somewhat during the price downturn by spending less and using available and new capital to pay down debt. That said, they still have very high debt-to-cash flow.

      I agree that huge inventories suggest that a return to higher prices may be more hope than reality at least for a year or so until those inventories are drawn down. But you can’t tell that to investors who are always trying to be ahead of pricing. More money, more drilling. The rig count in the U.S. has been rising impressively since mid-August and has exploded over the last 2 weeks with the big focus in the Permian basin.

      KXL is not approved. TransCanada has submitted a new proposal.

      All the best,


  • littlerico

    I too am very constructive on NG for reasons you have stated. Demand must be headed higher, while there is a limit on supply growth.
    Look forward to following your comments

  • Larry Bolenbaugh

    Art, many times you say in relation to oil and gas production that they are declining without saying why. Is it just because of economics with crashing prices and companies not able to afford the new investments or is it an actual physical decline in oil and/or gas reserves?? Are the shale reserves still quickly peaking and declining as you have said in the past?? Sometimes it seems confusing…

    • Arthur Berman


      Gas production is declining for many reasons. Conventional gas production is declining because few are drilling in those plays. Older shale gas production is declining because the core locations have been drilled and marginal locations are not commercial at current prices. Marcellus and Utica production is flat to declining because local markets are saturated and wellhead prices don’t justify more drilling. New pipelines to better markets in the southeastern U.S. hold hope for higher prices and, therefore, increased drilling and production.

      To further complicate the situation, a lot of gas is produced along with tight oil. Low oil prices mean less drilling and, therefore, less associated gas productions.

      I hope that this helps clarify what is confusing to you.


  • Jeff G

    Art- is the contango in the current price structure in NG a function more a function of the price to storage gas or markets anticipating a supply crunch in future months?

    • Arthur Berman


      I believe that contango is the normal state of an adequately supplied market. The market has anticipated tightening supply with higher prices. These theoretically result in more drilling and production. That is the part that remains to be seen. The market seems to have factored in new Marcellus-Utica pipeline capacity and that, along with warmer weather, largely account for price decrease over the last month.

      Thanks for your comment,


  • Heinrich Leopold


    Thank you for your Interesting article. Besides the tighter supply picture, there are also encouraging signs from the demand side. China has within two years nearly tripled its gas imports (from around 2 mill tons to 6 mill tons per month) and is about overtaking Japan as top gas importer very soon.

  • George Farish

    Gas price increase bodes well for U.S. midstream gas pipeline firms.

  • Tan

    Hello Art,

    May I know how the comparative inventory chart (figure 3) is constructed? What data is used and where I could find this.

    • Arthur Berman


      Use the EIA data on weekly stock changes. Use the commercial crude oil excluding SPR. For each week, take the average of the last 5 years on the same week. That is comparative inventory.

      There are many variations like taking a 5-year average of a several week moving average to smooth the data. You may also want to include a basket of petroleum products, especially gasoline and distillate fuel stocks, but the methodology is the same.

      All the best,


  • Jeff

    Hello Art-
    Can you explain why in Fig 5 of the post, dry gas production has increased ~ 17BCFPD (from 54BCFPD to 71BCFPD) from Jan 2009 to Jan 2017, while Fig 6 shows for the same time period, shale gas production has increased ~33BCFPD (from 9 to 42 BCFPD)? Does this indicate non shale gas production has declined ~ 16 BCFPD? (the exact numbers are little hard to read on these charts in my browser)

    Also given the continued decline in gas prices since they peaked in Dec, is there something else going on in the market that would negate the supply deficit shown in Fig 5 starting last December? There has been allot of selling since gas prices peaked at near $4 in December and the COT shows the commercials have been a large part of that selling. If they are hedging production what would be the reasoning for that if gas is still in a supply deficit.

    Last question- Does the supply deficit / supply surplus indicator relate to gas being stored or withdrawn from storage from season to season orr are these two different things…
    Thank you

    • Arthur Berman


      I think that you understand this correctly. Here is a chart that should fill in the blanks.

      Shale Gas and Conventional Gas Supply

      The supply-deficit indicator is based on EIA STEO data that sums net imports, production, consumption and inventory changes.

      All the best,


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