OREANDA-NEWS. February 17, 2017. US natural gas prices slid below \\$3/mmBtu this week, signaling that low prices may need to compensate for a lack of winter demand.

A sustained move below the \\$3/mmBtu mark could lead to higher demand for gas this spring from electric utilities or stunt production to force the market back into balance.

Prompt-month natural gas prices had moved higher this winter amid a steep decline in gas inventories, growing exports and year-over-year production declines. But an unusually mild January and predictions for warmer-than-normal weather in February could leave the gas market well stocked for spring.

Natural gas inventories, which can ease concerns about spikes in demand or supply shortfalls, are heading into the final weeks of the withdrawal season at 2.445 Tcf (69bn m?), 11pc lower than a year earlier but 3.7pc above the five-year average, according to the US Energy Information Administration (EIA). Draws from gas storage during the last month have been significantly smaller than the five-year average and may remain there given the mild weather forecasts.

The smaller draws have contributed to prices falling today to a fresh three-month settlement low of \\$2.854/mmBtu.

The EIA has already revised its end-of-winter inventory estimate higher, based on January weather that was about 14pc warmer than normal. The agency said it expects inventories to end the heating season on 31 March at 1.872 Tcf, up by 7.3pc from the EIA's previous outlook and 5pc higher than the five-year average.

Private and US government forecasters are predicting another bout of unseasonably warm weather in February, the penultimate month for winter heating. Furthermore, the weather usually warms in March, undermining gas demand and resulting in low seasonal draws.

The likelihood of gas inventories ending March at or above 2 Tcf "remains very strong," said GMP FirstEnergy analyst Martin King. Stockpiles would be about 500 Bcf below the seasonal record hit last year after a mild winter, he noted.

At that level, inventories could help cap a price rally near \\$3/mmBtu, a key price point.

US gas output has already shown the first signs of a recovery after prices made a lasting move above \\$3/mmBtu last fall. Gas could also regain some market share from coal below that level.

The US gas-directed rig count has steadily increased in gas-rich fields such as the Marcellus shale in Pennsylvania and West Virginia, and the Haynesville shale, which underlies parts of east Texas and northern Louisiana.

The gas rig count last week reached 149, up by 84pc from the 2016 low of 81 hit in late August and 46pc higher than a year earlier. Gross gas production in November 2016 increased by 1.1pc from the previous month, rising to 79.7 Bcf/d. November production was down 2.1pc from a year earlier. The month-over-month increase was the largest since February 2016, when gross production hit an all-time high.

But prices may garner more support as LNG exports rise from the Sabine Pass export terminal in Louisiana. The third train at that site started up this month, lifting the average intake there to about 2 Bcf/d, up from nearly 100mn cf/d a year earlier. Pipeline exports to Mexico have also surged and in November averaged 3.9 Bcf/d, a year-over-year increase of 29pc.

"If we do not see production rebound, pipeline and LNG exports will lift prices back above \\$3/mmBtu," Gelber & Associates analyst Kent Bayazitoglu said.

A sub-\\$3/mmBtu gas price could threaten the drilling recovery and also support a price increase.