Record high US natural gas inventories and production prompted energy analysts to slash their 2012 price estimates to levels that if reached would be the annual average in 13 years, though expectations are that producers may find some relief next year.
After one of the mildest winters on record sharply slowed heating demand and left a record amount of gas in inventory, a Reuters poll of analysts saw price estimates for 2012 cut by 23 percent - 37 percent below the 2011 average price.
Even with some producers pledging to curb output to counter the drop in gas futures, which fell 35 percent to 10 year lows below $2 per mmBtu this year, output continues to run at or near an all-time peak and shows little signs of slowing.
As inventories fill to near capacity later this summer, producers could be forced to shut in flowing gas and prices could sink much lower in order to attract more demand to balance the market.
"There's so much inventory out there due to an unusually warm winter. Even though underlying consumption is picking up, it won't be enough to avoid problems later this summer or in early autumn when we might run out of storage capacity," said Earl Sweet at BMO Capital Markets in Toronto.
The Reuters quarterly poll put the consensus forecast for the average spot price this year at Henry Hub, the benchmark US supply point in Louisiana, at $2.55 per million British thermal units, down from last quarter's estimate of $3.30 and below the $4.02 realised aver age in 2011.
If the forecast is correct, it would mark the lowest Henry Hub mean since 1999 when the Hub averaged $2.27, according to Reuters data.
Prices in 2013 were seen gaining 39 percent to $3.54 as producers continue to shift away from dry gas drilling, and an improving economy and tighter emission rules lift industrial and electric power demand for gas. Estimates for 2013 were down 11 percent from the previous quarter's poll.
It was the eighth straight quarter that analysts trimmed estimates for 2012 prices since Reuters began polling for 2012 back in January 2010, when the yearly estimate was $6.75.
Henry Hub prices averaged $2.51 in the first quarter, down 40 percent from the $4.15 average during the same 2011 period.
Of the 26 participants in the poll, there were 23 downward revisions and no upward revisions. Three did not participate in the previous poll published in late January, and price estimates for 2012 ranged from a low of $2.15 to a high of $3.18.
While rising production, primarily from record shale output, has driven prices steadily lower in the last few years, storage is expected to be a bigger factor pressuring prices this year.
Utilities typically stockpile gas from April through October to help meet peak winter heating needs. Injections started about two weeks early this year after a mild winter slowed storage withdrawals by about 30 percent.
Recent US Energy Information Administration data showed gas inventories started the injection season at 2.480 trillion cubic feet, 930 billion cubic feet, or 60 percent, above normal and well above the prior March 31 record of 2.148 tcf in 1983.
Concerns are growing that the huge overhang will not only drive prices lower this spring as seasonal weather demand fades, but pressure prices again later this summer as storage caverns fill up and drive more supply into an oversupplied market.
If weekly stock builds through October match the five-year average, inventories would top out at 4.595 tcf, a physical impossibility if peak capacity estimates of 4.1 tcf are correct.
The fairly steady drop in dry gas drilling over the last six months - the Baker Hughes gas rig count is down a third at a 10-year low since peaking at 936 in October - has raised expectations that producers were getting serious about stemming the flood of record dry gas supplies. Several key producers including Chesapeake, the country's second-largest and Encana, Canada's largest, have said they will shut in some gas output or trim spending in pure dry gas plays due to the price slide this year.
But the cuts announced so far of just over 1 bcf per day, or about 1.5 percent of estimated annual production, have not been enough to tighten a market saddled with record supplies.
A recent EIA report offered little hope for bulls. The agency again raised its estimate for marketed gas production this year, expecting output in 2012 to climb by 3 bcf per day, or 4.5 percent, to a record 69.22 bcf daily.
"Even with the low rig count and the production cuts announced, production is not going down very much," said Vikas Dwivedi, head of oil and gas strategy at Macquarie Capital.
Though production growth is expected to slow later this year as low prices make most dry gas drilling uneconomic, increased drilling in more profitable shale oil and liquids plays still produces some dry gas that should keep net output up this year.
While there is no one factor that can eliminate the oversupply, coal-to-gas switching offers the best chance of tightening the balance, according to analysts.
Low gas prices have prompted utilities to switch from coal to cheaper gas to generate power, adding as much as 5 bcf per day, or 7 percent, to total gas demand this year.
Analysts say lower prices could add another 2 bcf per day to demand and go a long way in absorbing excess supply even if summer weather this year falls short of last year's record heat.
"At the same temperature, we're burning 6 bcf or more gas per day than last year. Absent constraints because of storage congestion or high coal inventories, the market should be fine," said Anthony Yuen, strategist at Citigroup in New York.
Yuen noted that gas storage congestion, particularly in the producing region, could distort the market and drive prices lower. He also said high coal inventories could force some utilities to burn coal regardless of price to make room for future shipments. That would lower the impact of switching.
Cheap gas prices have also drawn more interest from energy intensive industries like petrochemicals, steel and paper. Demand from the industrial sector is estimated to be running about 0.5 bcf per day higher this year.
A hot summer like last year could also ease some of the downward pressure on prices, but forecasters so far are only looking for a slightly warmer than normal summer.
Tighter environmental rules on emissions should also favour gas, a less polluting fossil fuel, by making power produced by inefficient coal units too expensive.
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