Business / Technology

NEW YORK — Natural gas's worst start to a year since 2001 has the most accurate forecasters predicting further price declines as surging U.S. shale production threatens to overwhelm the nation's storage facilities.

Prices may drop below $2 per million British thermal units (Btu) for the first time since 2002 amid the prospect of stockpiles exceeding storage capacity in October, according to Bank of America, Barclays Capital and Prestige Economics.

Inventories will probably end March at 2.15 trillion cubic feet, an all-time high for that time of year, Bank of America says.

"If we exit the winter with such high levels of inventories, there's a real risk of gas prices coming down very sharply in the fall," said Francisco Blanch, the head of commodities research at Bank of America in New York and the most accurate forecaster of U.S. gas ranked by Bloomberg in the eight quarters ended Dec. 31. "Gas production has to come down," he said in a phone interview Jan. 13.

Prices have fallen as profits from oil and gas liquids, such as ethane and butane, have subsidized natural-gas output from shale. Ethane at the Mont Belvieu hub in Texas rose 30 percent last year, while natural-gas futures tumbled 32 percent.

Gas production grew by a record 4.5 billion cubic feet a day in 2011, the Energy Department said in a Jan. 10 report, while demand lagged behind at 920 million.

Natural gas for February delivery rose 2.9 cents to $2.554 per million Btus on Tuesday in New York. Gas, which is down 44 percent from a year ago as warmer winter weather saps demand, fell to $2.231 on Jan. 23, the lowest price since February 2002.

Temperatures averaged 36.9 degrees Fahrenheit in New York City through Jan. 18, 4.4 degrees above normal, according to the National Weather Service.

Last month's average temperature in the Northeast was 34.1 degrees Fahrenheit, or 5.3 degrees above normal, making it the sixth-warmest December since 1885, according to the National Climatic Data Center in Asheville, N.C.

Improved technology has allowed companies to boost shale-gas yields while reducing costs, said Brison Bickerton, a managing director at Freepoint Commodities. Producers use hydraulic fracturing, which involves pumping water, sand and chemicals underground at high pressure to extract the fuel from the rock.

Companies are also drilling longer wells with monitoring equipment that allows them to pinpoint where to fracture the rock, Bickerton said Jan. 13. They can return to existing drilling sites later and place multiple wells in the same area, he said.

"It is fair to say the market has underestimated the extent of the technology shock in the production of shale gas," he said. "It looks like we're going to see inexpensive gas for a long, long time."

Producers may not reduce output by a "meaningful" amount this year even if prices slip below $2 per million Btu, according to Barclays Capital.

Companies will probably cut plans for drilling rather than shut wells already in operation, said Michael Zenker, an analyst at the bank.

"We don't believe there is a short-term floor for prices," said Zenker, ranked fifth among gas-price forecasters by Bloomberg.

Hedge funds turned bearish on U.S. natural gas last week for the first time in eight weeks as a surplus and warmer-than- normal weather pushed the price of the heating fuel to the lowest level in more than two years, according to the Commodity Futures Trading Commission.

Goldman Sachs, Deutsche Bank and Bank of America have cut their 2012 natural-gas price forecasts this year, citing growing output and storage. Bank of America reduced its estimate by $1 to $3.30 per million Btu Jan. 10.

Production of the fuel will rise 2.2 percent to a record 67.34 billion cubic feet per day in 2012, according to the Energy Department.

"Producers are pumping gas at one-fifth or one-tenth of the cost of the first well they drilled a few years ago," Bickerton said. "It's hard to see a rally at any point in 2012."

Rising output has contributed to surplus inventories over the five-year average, said Jason Schenker, the president of Prestige Economics, an energy-advisory company in Austin, Texas. Schenker was third among gas-price forecasters ranked by Bloomberg for the eight quarters ended Dec. 31.

"It would not surprise me to see gas prices below $2," Schenker said. "If supply continues to outstrip demand in a massive way throughout the year, it's going to be hard to find a bottom for the market."