During the first week of March 2016, the price of natural gas in the U.S. fell to $1.49 per million British thermal units (MMBtu). It was the lowest closing price recorded in decades, despite growing natural gas demand.

But natural gas production had also grown rapidly as a result of the shale drilling boom, and in fact gas output  was outpacing demand by a large enough margin that storage levels hit all-time highs in the U.S. late last year. In the year since, the volume of natural gas in storage has remained at a five-year high:  

Natural gas consumption in the US is highly cyclical. Between April and November of each year, more natural gas is produced than consumed.  Producers store the excess output underground in pressurized caverns and other repositories until mid-fall, when inventories typically peak and are then depleted through the winter. The extent of inventory build across the summer and of the withdrawals over the winter strongly influences natural gas prices.

A very cold winter in 2014-15 caused inventories to fall to five-year lows. The months following saw natural gas prices spiking above $6/MMBtu at times. But then a mild summer (reducing the need for air conditioning and natural gas demand by utilities) and record output from natural gas producers restored inventories to normal levels by the beginning of the 2015-16 heating season.

The mild winter that followed kept inventories high, resulting in the price plunge in March of this year. But as I have pointed out on many occasions, historically natural gas prices below $2.50/MMBtu haven’t proven sustainable for long. Lower prices caused production to slow, and then a hot summer resulted in subpar summer inventory build.

Those who have taken our advice on natural gas in The Energy Strategist this year have been amply rewarded. However, even though natural gas prices have now topped $3/MMBtu, we’re skeptical that they will continue to surge into the winter. The production declines precipitated by sub-$2/MMBtu gas will slow and potentially turn back into output growth at current levels. Further, if the coming winter proves mild again, we should see downward pressure on prices as spring approaches.

The bottom line on natural gas is that the past few months have been rewarding. We had a high degree of confidence this would be the case, as reflected in numerous bullish articles and  winning stock picks. (See MoneyShow Score: EQT Corp.). But the next few months look more like a coin flip. It all depends on the weather.

For longer-term natural gas investors, the outlook remains the same. Long-term demand drivers continue to accumulate, and this will ultimately drive prices higher. The only thing that will keep them in check over the next few years is continued strong shale gas production. And that’s not necessarily a negative for shale gas producers.

Keep an eye on inventories as winter progresses.  

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)