The Natural Gas Rally Is Over. Why the Price Could Fall Further.

The price of natural gas fell below $3 per million British Thermal Units for the first time since May 2021 on Wednesday, and it kept dropping on Thursday. It's a stunning decline for a commodity that had traded above $9 as recently as August.

The biggest reason for the decline is the warm weather this winter in Europe and the U.S. People are using less gas for heat, allowing more of it to build up in storage.

Russia is one of the world's largest producers of natural gas—used for electricity generation and combustion in industrial plants, as well as heating—so prices soared after it invaded Ukraine last February. But the crisis brought on by the war and the gas shortage it caused has ended, for now at least.

Europe imported enough gas from other suppliers to make it through the winter, and warm weather has caused demand for heating gas there to fall. In the U.S., where natural-gas prices are lower than in Europe because of abundant domestic supplies, demand has also fallen because of warm weather even as supplies of gas have increased.

Matt Portillo, an analyst at Tudor, Pickering, Holt & Co., predicted last year that natural-gas prices would fall in 2023 because supply would outpace demand. In an interview on Thursday, he said that prices had fallen faster than he expected, but that he anticipates they will drop even more.

On Thursday, U.S. prices fell to $2.94 per million BTUs. Portillo thinks they could fall to around $2.50 before the selloff slows.

Right now, the U.S. is producing about 4 billion cubic feet of gas a day more than people are using, out of a total daily supply of 100 billion cubic feet. For prices to stabilize, some producers will have to reduce their output, which will cause supply and demand to balance out.

"We're expecting as gas moves towards $2.50 over the next couple of quarters that you'll start to see a big fall in the rig count," he said.

Portillo is bullish in the longer term on natural gas because he expects more to be exported once there is enough capacity to ship it out of the U.S. But it will take more than a year for that to happen: It takes years to build the plants that can liquefy gas and get it ready for shipment overseas.

Supply and demand will likely come into balance over the next 18 months, Portillo said. "By the time we get to 2025, we think the market starts to look quite tight," he said.

He added that although more investors are getting interested in natural gas as its long-term prospects comes into focus, he thinks now is too early to buy shares of gas producers. The stocks haven't yet fallen as much as the commodity.

EQT (EQT), for instance, is down 10% this year, even as natural gas has fallen 34%. For now, the only stock Portillo is recommending is Chesapeake Energy (CHK), which is in the process of selling off some of its holdings.

"We think they're gonna get about three and a half billion dollars of transactions done," he said. Portillo expects the company to use the proceeds to buy back stock.