Why U.S. Gas Bears Got Last Week's Supply Decline So Wrong

For the second time in a month, U.S. natural gas stockpiles shrank by more than traders expected -- a surprise that caused prices of the fuel to spike, averting a 20-year low.

Why was the market so off about last week’s inventory drop? One explanation: It failed to account for a 1.2 billion cubic-foot-a-day slide in gas production. That’s how much output has fallen in the U.S. Northeast alone since Feb. 5, according to pipeline data compiled by Bloomberg New Energy Finance. After years of exponential growth, drillers facing the pressure of prices below $2 per million British thermal units are finally retreating.

Gas futures at a 17-year low are forcing all but the most efficient drillers to curtail production, offering a ray of hope for bulls in the market. Hedge funds have held a net bearish position in U.S. gas for over a year as mild weather limits demand and output from the Marcellus reservoir in Appalachia, America’s most prolific shale play, pushes stockpiles to a seasonal record.

“Production has been on a decline,” said Het Shah, an analyst at Bloomberg New Energy Finance in New York. The failure to predict last week’s inventory drop was “a combination of both a supply and demand miss, but if I had to guess, I think we’re more weighted on the supply miss.”

Natural gas for next-month delivery on the New York Mercantile Exchange is down about 30 percent this year and settled at the lowest level since Feb. 26, 1999, on Thursday. Prices surged to as high as $1.695 per mmBtu after the Energy Information Administration reported last week’s inventory drop.

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