Natural Gas Prices Finally Find a Floor in the U.S.

After spiraling downward for months, the US natural gas market has finally found a floor.

Prices for the fuel had their biggest single-day gain in more than 18 months Wednesday after one of the largest domestic producers, Chesapeake Energy Corp., said it was slashing its output forecast.

You could practically hear gas bulls breathe sighs of relief. Prices have been cratering since the start of the year as an unusually mild winter hobbled demand for the fuel that’s used for heating and electricity generation.

By the second week of February, as temperatures in New York were teetering toward a spring-like 50F (27.8C), US gas futures settled below $2 per million British thermal units for the first time in nearly a year. A few days later, they were flirting with $1.50.

Finally Chesapeake stepped in, announcing late Tuesday it would cut production about 20% this year. Prices immediately surged.

The following morning, with futures for March delivery up as much as 14%, Bank of America Corp.’s veteran analyst Doug Leggate paused for a moment during a Chesapeake conference call to acknowledge the company had nudged the market in a new direction.

“This is something I think the rest of the industry could pay attention to,” Leggate said.

While the move provided a safety net, investors shouldn’t expect a resounding bounce back.

Gas storage levels are more than 20% above the five-year average. So even if other producers follow Chesapeake’s lead and cut production, there’s still plenty of backup fuel to burn through.

Weather forecasts for much of the US, meanwhile, continue to indicate warmer-than-average temperatures in the weeks ahead. That means demand is unlikely to significantly kick in until the air-conditioning season arrives in May.

So odds are that manufacturers, fertilizer makers and homeowners with gas furnaces and stoves will continue to enjoy cheap fuel in the months ahead.

But gas bulls can take heart in their newfound protection against prices falling much further.

—Joe Ryan, Bloomberg News