A recent article in The Wall Street Journal reported that prices had retreated from yearly highs to $3.31 a mcf. The Journal stated that:
“The market is still up 26% in two months, in a rally that pushed prices to a 22-month high earlier this week. Many people have been counting on a combination of winter heating demand and lower drilling activity to lead to higher prices. Analysts, however, warned production could still ramp up quickly and that it is too early to know if winter would be colder than normal.”
The two big drivers for the price move up have been increased consumption by natural gas fired generation plants and a record low number of drilling rigs operating in the U.S. shale plays. The big variable looking ahead is the winter weather. A cold winter results in increased gas consumption for heating therefore supporting prices.
As natural gas prices move above $3.00, they close in on levels that appear to be able to support both increased drilling and increased consumption – somewhat of a pricing sweet spot. The next couple of months will be important as far as establishing pricing trends entering 2017.