Natural gas prices rose by 59% in 2016 compared with 2015. That was the highest increase since 2005.
The highest price of 2016 was $3.99 per MMBTu (Million British Thermal Units) on December 28th, 243% higher than the lowest prices of 2016 of $1.64 on March 3rd.
So what are the main drivers of such price increases in the gas markets?
First, is the weather forecast. In mid-January, an arctic blast is expected to hit northern and northwest and temperatures will be as low as they were in 2013-2014 (when gas prices skyrocketed). Around 50% of the US households use natural gas a source for heating. Cold weather drives the demand up which will lead to price increases.
Secondly, is the level of gas inventories. The level of inventories fell from the 5-year average due to high demand (caused by cold weather). In December of 2015, the inventories fell by 58 Bcf (billion cubic feet) while in the last week of December 2016, it fell by 209 Bcf (almost 400% higher). The 5-year average was 80 Bcf.
Thirdly, is the natural gas production. In 2016, the US gas production fell for the first time in 10 years. The President Elect, Donald Trump, has promised to reduce regulatory restrictions on the exploration and production of natural gas and oil. These actions will increase the level of natural gas supply and pressure the prices to go down.
In the third week of December 2016, the gas consumption rose by 25% compared with the same period in 2015. The EIA (U.S. Energy Information Administration) estimates that US natural gas prices could average $3.27 per MMBtu in 2017. It averaged $2.49 per MMBtu in 2016 and $2.63 per MMBtu in 2015.
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