Natural gas prices plummet amid high US production, warmer weather

Consumers can expect lower natural gas costs this winter compared to last year thanks to milder-than-expected weather and increased supplies.

“The warmer temps both in the US and Europe is keeping a 'sell the rallies' trade in place,” Dennis Kissler, senior vice president at BOK Financial, said in a recent note to clients.

"With new highs in production and no winter demand the path of least resistance remains lower,” Kissler added.

On Tuesday, natural gas futures (NG=F) were hovering just above $2.30 per million British thermal units (MMBtu). Contract prices are down 25% over the past month, and about 40% lower year to date.

The downward trend is a sharp contrast to $10 per MMBtu peaks reached in the US last year and record levels in Europe after Russia invaded Ukraine.

“The situation in Ukraine, while volatile internally, has been impactful on the energy sector overall,” Irina Tsukerman, president of market research and geopolitical risk advisory at Scarab Rising, told Yahoo Finance.

Increasing crude oil production in the Permian Basin area of the US is driving more natural gas supplies into the market.

“When you produce oil, it also produces a lot of gas,” Birol Dindoruk, a professor in petroleum, chemical, and biomolecular engineering at the University of Houston, told Yahoo Finance. “Excess gas has to be somehow sold."

The Energy Information Administration predicts US natural gas output will hit a record high this year. In the last week of November, natural gas storage was up 7.3 % from a year ago, and about 6.7% higher over a five-year average.

“The US is becoming more of a major player and some of the excesses of the demand have worn off,” Tsukerman said.

However, Tsukerman predicts demand will grow as the green energy sector's expansion "has hit quite a snag in a lot of places" and the warmer weather we're seeing now may not last.

BOK Financial's Kissler noted that a cold blast, coupled with the oversold conditions, could be a recipe for a price spike, creating an "exaggerated short covering type rally."

Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre.