Natural Gas Outlook 2016: Prices to Stay Down on Oversupply

- December 22nd, 2015

Natural gas prices have not been so hot lately. And unfortunately with the current oversupply situation, the natural gas outlook for 2016 is not optimistic.

Bears are out in full force in the natural gas market.
Natural gas prices sank to a 16-year low in early December, with the spot price for US Henry Hub checking in at $1.62 per million British thermal units (mBtu); meanwhile, in New York, natural gas futures were down at $1.734 per mBtu.
Overall, 2015 has not been kind to the energy sector. In fact, as Zacks points out in a recent article, “the free-fall in oil prices have made ‘energy’ the most talked-about sector of the entire market in 2015.”
That said, natural gas prices weren’t faring too poorly early on in 2015. Indeed, as Bidnessetc recently highlighted, “[g]as prices were in their normal range in August.” However, as with oil, the booming shale gas business in the US has served to dramatically boost domestic natural gas reserves.
In fact, as 2015 entered its final quarter, natural gas prices “slid on worries over the supply and a large amount of inventories on hand. In November, supplies hit their highest-ever recorded figure of 4.009 billion cubic feet (Bcf).”


US natural gas storage now stands at 3.956 trillion cubic feet, according to Investing.com; that represents a 13.7-percent increase from levels seen during the same period last year, and is 6.2 percent above the five-year average for this time of year.
“Last spring, supplies were 55% below the five-year average, indicating producers have more than made up for all of last winter’s unusually strong demand,” Investing.com states.
While that’s fairly dramatic, it’s worth noting that shale gas extraction is not the only reason natural gas inventories are running high. In the winter months, investors can generally expect higher natural gas prices as consumers turn up the heat to stay warm. However, 2015 is proving to be a year of warmer temperatures, and that has further raised oversupply concerns.

Low prices, oversupply to stay … at least for now

Unfortunately, investors hoping to see a boost in natural gas prices next year shouldn’t hold their breath.
According to Bloomberg analyst Andrew Cosgove, the outlook for natural gas is still “very persistent high production and we haven’t have the pull on the demand side weather this year either.” The analyst also said that while industrial demand is still humming along at a decent clip, it will not be enough to alleviate market pressure.
Looking at the European market, Cosgrove added, “[c]apex is going to stay elevated in Russia for the most part next year. Unfortnately on the gas side and on the oil side you are going to have resilient production for both hydrocarbons and that is going to translated inot portentially a cap on prices as you look into the European market and you see new LNG projects coming online next year.”
All that is to say that in 2016, operators are going to have to adjust to the new normal of sub-$2 natural gas prices.


 
Securities Disclosure: I, Vivien Diniz, hold no direct investment interest in any of the companies mentioned in this article.
Related reading: 
Oil and Gas Price Outlook for Q4 2015
Gas Outlook 2015: Cold Weather Could Help Prop Up Gas Market
EIA Annual Energy Outlook 2015: Natural Gas Highlights

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