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 <br /> <br /> <br />What is driving natural gas prices? <br />Production <br />Much has been written over the last few years about “fracking,” or the technology of hydraulic <br />fracturing in horizontally drilled wells that has made it possible to extract natural gas from <br />abundant shale formations. This has radically changed the U.S. natural gas supply picture. <br />Production in the U.S. lower 48 states has increased at an accelerating pace since 2009 and hit <br />record levels of over 62 billion cubic feet per day in 2011. The steady increase in supply has <br />been a major contributor to the low prices of the past few years compared to 2008 and earlier. <br />Additionally, rig technology continues to improve, leading to lower drilling costs and higher <br />initial production rates. And gas is essentially being produced free as a byproduct of drilling for <br />oil using the same technologies that unlocked the shale gas boom. All of these factors have led to <br />increased domestic supply at lower cost. <br />Weather and storage <br />In spite of strong domestic production, natural gas prices held at around $4 per million British <br />thermal units (MMBtu) until falling dramatically over the last six months. The main cause of the <br />recent precipitous price decline is weather, specifically, an unusually mild winter. <br />On average across the U.S., the winter of 2011-2012 was the warmest in 60 years by a large <br />margin. The estimated decline in U.S. demand for gas ranges from 400 billion cubic feet (Bcf) <br />to 800 Bcf due to temperature variation alone. Combined with the continued strength in <br />2 <br />