Goldman Sachs was well positioned before they came out with their projection for NG. Somehow, and this doesn't happen every time GS releases a forecast, NG just took off.
Yes, there's only 375 dry gas rigs in operation. But rigs drill wells, and I've never seen a well count number.
It's getting warmer, even though more cold weather is on the way, in the next couple of days.
Electricity producers are supposed switch from NG to coal, after NG hits $3.50/mmBTU. Coal is priced at about $2.51/mmBTU. With NG at $4.14/mmBTU, the spread is $1.63/mmBTU. That spread is the savings power companies would reap, by switching to coal.
This price just doesn't make sense. I think this is an example of market mispricing.
The Seeking Alpha article "Why Natural Gas Could Make a Run Towards $5 This Spring" discusses your issues in detail.
In general there is insufficient gas production in 2013 to meet expected demand even with massive gas to coal switching included in the supply/demand balance.
Why is this happening when the common wisdom is that the natural gas producers are happy with low prices and there is some magical technology improvement in gas drilling allowing 375 drilling rigs to match the production with double the number of rigs from a few years ago?
Here is a simple explanation:
1. Drilling budget cutbacks - The natural gas producers starting slashing budgets 12 months ago continuing into 2013. It has taken awhile for these drilling cutbacks to affect production since there were many wells already drilled and capped that were brought into service. The drilling budgets are not coming back anytime soon since the average all in cost for natural gas producers is $6.31. Why spend drilling budgets on dry natural gas when there is money to be make in liquids? Until sustained prices are above $5 mmBTU, the dry gas drilling budgets are not coming back.
2. Depletion of shale gas wells - The annual depletion of shale gas wells can be 50% in year one and then 30% annually in subsequent years. The drilling cutbacks in the last 12 months will have a big impact as depletion cuts into supplies. In 2013, the natural gas supply can go into decline causing prices to go up slowing down demand.
The common wisdom is that the natural gas producers are so cash strapped that they will jump back into dry gas drilling at any price causing another surplus. If you look at the recent public statements by the CEO's of Ultra Petroleum and EOG Resources, they understand that discipline with drilling budgets are a key issues and they are holding tough on slashed budgets without sharply higher prices.