Prices plunged 21% in 2017 for the worst year since 2014, despite a rally in late December

Alison Sider
Jan. 1, 2018 7:00 a.m. ET

Investors wagered on a natural-gas rally last year but it never came. Instead, prices plunged 21% for the worst year since 2014.

Heading into 2017, some investors thought natural gas could extend the gains from 2016, betting that new gas-fired power plants and record exports would burn off the excess supplies that fracking had unleashed. But gas prices ended the year at $2.953 a million British thermal units, compared with $3.724 at the end of 2016.

Temperate weather was partly to blame: Last winter was mild for a second year in a row—cutting into demand for home heating fuel—and temperatures didn’t rise high enough in the summer to spur high levels of air conditioning use. Adding to challenges was an onslaught of new production, dashing investor hopes that the U.S. would export itself out of a glut.

In early December, short bets on natural gas by money managers, hedge funds and other speculative investors outnumbered long ones—indicating investors were expecting natural-gas prices to drop further. That is a sharp reversal from the beginning of 2017, when bullish wagers outnumbered bearish ones by more than two to one.

“It just didn’t pay them to be long,” said Tom Saal, a broker at INTL FCStone.

Gas also had more competition as a fuel for electricity generation in 2017. Coal use is still on the decline, but it was more cost competitive last year, analysts said. At the same time, rising use of renewables squeezed gas-fired power, as the end of a drought in the western U.S. spurred more hydroelectric power generation.

Some analysts say prices have fallen too far. They point to how the amount of gas in storage is relatively low for this time of year, with plenty of time left in winter.

“The market hasn’t really absorbed the fact that we’re at or below longer-term average storage levels,” said Christopher Louney, a commodity strategist at RBC Capital Markets. Stockpiles of natural gas being held in storage stand at 3.332 trillion cubic feet—1.8% below 2016 and 2.5% below the five-year average.

Prices staged a comeback in the final days of 2017, rising 12% from Wednesday through Friday as an Arctic chill set in.

Natural-gas shipments to Mexico are up 13% from 2016. Exports of superchilled liquefied natural gas rose to 2.2 billion cubic feet of gas a day—more than three times as much as in 2016, when cargoes began to depart from the Gulf Coast, according to S&P Global Platts Analytics.

Still, any potential price increase from cold weather going forward has been diminished by the sharp rise in U.S. natural-gas production, analysts at Goldman Sachs wrote recently.

By late December, U.S. production had climbed to more than 77 billion cubic feet a day—more than 8% above the same time in the prior year, according to Platts.

Some of it came from oil fields, like the Permian in Texas, where gas bubbles to the surface along with crude. That production is likely to keep flowing no matter how low prices get.

New pipelines in the Northeast have also unleashed output that had been locked in the mammoth Marcellus and Utica shale formations. Production in those regions has jumped by 17% from the prior year, according to Platts.

John Borruso, director of natural-gas trading at Con Edison Energy, said he expects producers will be able to bring enough gas production online to meet rising demand from the power sector and to satisfy export markets.

That will likely keep gas prices tightly locked between $2.50 and $3.50 a million British thermal units, potentially for a few years. “We’re going to sit there,” he said.

That outlook suits some just fine. Ryan Kelley, portfolio manager of the Hennessy Gas Utility fund, says lower prices benefit utilities and gas distribution companies.

“We like long term low and stable natural-gas prices,” he said. Last year was “a good example of that.”

Write to Alison Sider at alison.sider@wsj.com