The first two weeks of December were unusually cold, pulling large amounts of natural gas from storage and causing prices to soar above $15\/MMBtu. In marked contrast, the last three weeks have been downright balmy. Draws on storage have been small, and prices have plummeted to pre-Katrina levels, closing Thursday at $9.50\/MMBtu. Such wild swings in gas prices were impossible only a few years ago, when a staid gas market kept prices in the $2 range year after year. Those days appear to be gone forever - analysts agree that extreme volatility is now a permanent feature of North American gas markets. It is now obvious that the market overreacted to the production lost as a result of the hurricanes. There never was any real danger that the U.S. would run short of gas this winter, as readers of this column know. Nevertheless, constant repetition by the popular media that the storms were responsible for high gas prices was a self-fulfilling prophecy that propelled prices upward. Meanwhile, insiders were betting (correctly) that prices would rapidly decline and taking short positions in the market. A lot of money has changed hands in the last few months. Recently released preliminary data from the U.S. Energy Information Agency provide some clues as to why the market is so nervous. In September and October 2005, U.S. natural gas production dropped more than 500 billion cubic feet compared to the same two months in 2004. Only 400 bcf of this decline was due to Katrina and Rita. In other words, even if the storms had not occurred, U.S. gas production would have dropped more than 3 percent compared to the same two months in 2004. For the 12-month period ending October 2004, U.S. gas production was about 450 bcf lower than the previous year's output (2.4 percent) after adjusting for hurricane-related losses. Net imports from Canada and liquefied natural gas were virtually flat. Despite phenomenal prices and a hefty increase in the number of gas wells drilled (18 percent increase this year over last year), U.S. gas production continues to decline. The good news is that consumption has also dropped as a result of storm-related damage and high prices. The oft-heard media reports that U.S. gas consumption is increasing are simply not true. How could we be burning more gas when supplies are shrinking? Unfortunately, the decline in consumption is smaller than the decline in supply - the U.S. ran a natural gas deficit last year, and that understandably makes the market nervous. So we enter the new year pretty much where we were before the hurricanes. Gas prices will probably drop another few dollars as the heating season draws to a close. But crude oil prices are slowly climbing over $60\/barrel again (over $10\/MMBtu), which should provide support for gas in the $7-8\/MMBtu range. However, the weak North American gas supply situation will keep the market nervous. As we saw last year, Mother Nature may have some surprises in store for us. Happy New Year to all.