It’s easy to understand why natural gas prices are so low. The United States today produces more gas than it can consume, so inventories are building to record highs and prices continue to drop.

U.S. natural gas inventories could top 4 trillion cubic feet by the end of the year

Natural Gas

Based on the most recent EIA Weekly Natural Gas Storage Report, working stored natural gas hit 3,929 billion cubic feet (Bcf) as of October 30th. This ties the prior weekly record of 3,929 Bcf established on November 2, 2012. October is the official end of the injection season, but inventory increases often last through the first few weeks of November. The report suggests that, given unseasonal warm weather conditions, inventories could top 4 trillion cubic feet here in the next month or so.

Also of note, inventory has been building up throughout the summer, with levels above the five-year (2010–14) average most weeks. Given an estimated net injection of 2,453 Bcf since the refill season kicked off this spring, the 2015 injection season has been the second-highest net build ever, end up slightly below 2014s record overall injection.

Marketed natural gas production levels remained several billion cubic feet per day (Bcf/d) above year-ago levels throughout the year and they hit a new monthly record in August  at 81.3 Bcf/d, 1.5 Bcf/d above the prior record. Of interest, the electric power sector was responsible for a good chunk of the growth in production, as cheap gas prices and high electricity demand due to warm temperatures saw a boost in consumption of natural gas for power generation.

That said, even given high power-sector usage, supply still easily exceeded demand, leading to greater-than-average storage injections. Relatively low natural gas prices do not appear to have had much impact on production to date. Benchmark Henry Hub spot gas prices have stayed under $3 per million British thermal unit the entire year, and EIA’s Short-Term Energy Outlook anticipates that these prices will remain below $3/MMBtu through at least mid-2016.

The EIA also projects that natural gas inventories will close out the first quarter of 2016 at1,900 Bcf. That means close to 2,000 Bcf would have been withdrawn from storage between November and March, a notably smaller drawdown than the running five-year average.

Moreover, natural gas production is projected to be greater this winter compared to last winter, further reducing gas withdrawn from storage. The EIA is also projecting a reduced overall heating demand this winter, given NOAA’s current forecast for a warmer-than-usual winter this year.