Nat Gas Prices: Freefall Continues - Analyst Blog
April 09 2012 - 10:02AM
Zacks
The U.S. Energy Department's weekly inventory release showed a
larger-than-expected increase in natural gas supplies, as
record-warm March temperatures across the country have restricted
the commodity’s requirement for power burn. The injection – third
in 2012 – has added to the already bloated inventories, thereby
pressuring spot prices that slipped to a 31-month low.
Gas stocks – currently some 60% above the benchmark five-year
average levels – are at their highest point for this time of the
year, reflecting low demand amid robust onshore output.
The Weekly Natural Gas Storage Report – brought out by the
Energy Information Administration (EIA) every Thursday since 2002 –
includes updates on natural gas market prices, the latest storage
level estimates, recent weather data and other market activities or
events.
The report provides an overview of the level of reserves and
their movements, thereby helping investors understand the
demand/supply dynamics of natural gas.
It is an indicator of current gas prices and volatility that
affect businesses of natural gas-weighted companies and related
support plays like Anadarko Petroleum Corporation
(APC), Chesapeake Energy (CHK), Encana
Corporation (ECA), Devon Energy
Corporation (DVN), Nabors
Industries (NBR), Patterson-UTI
Energy (PTEN), Helmerich & Payne (HP)
and Halliburton Company (HAL).
Stockpiles held in underground storage in the lower 48 states
rose by 42 billion cubic feet (Bcf) for the week ended March 30,
2012, above the guidance range (of 33–37 Bcf gain) as per the
analysts surveyed by Platts, the energy information arm of
McGraw-Hill Companies Inc (MHP).
The increase – the third injection of 2012 – is well above the
5-year (2007–2011) average build of 8 Bcf for the reported week and
compares with last year’s draw of 29 Bcf.
As a result of last week’s stock build, the current storage
level – at 2.479 trillion cubic feet (Tcf) – is now up 887 Bcf
(55.7%) from last year and 934 Bcf (60.5%) over the five-year
average.
With this huge and sharply widening natural gas surplus,
inventories in underground storage have started to climb weeks
earlier than the usual summer stock-building season – from April
through October. They have persistently exceeded the five-year
average since late September last year and are likely to beat the
previous winter (March 31) record of 2.1 Tcf set in 1983.
A supply glut has pressured natural gas prices during the past
year or so, as production from dense rock formations (shale) –
through novel techniques of horizontal drilling and hydraulic
fracturing – remain robust, thereby overwhelming demand.
As a matter of fact, natural gas prices have dropped
approximately 57% from 2011 peak of $4.92 per million Btu (MMBtu)
in June to the current level of around $2.10 (referring to spot
prices at the Henry Hub, the benchmark supply point in Louisiana).
Incidentally, prices hit a 31-month low of $1.88 during last
week.
To make matters worse, a near-record mild weather across most of
the country curbed natural gas demand for heating all winter,
leading to an early beginning for the stock-building season. The
grossly oversupplied market continues to pressure commodity prices
in the backdrop of sustained strong production.
This has forced several natural gas players to announce
drilling/volume curtailments. Exploration and production outfits
like Ultra Petroleum Corp. (UPL ) , Talisman Energy Inc.
(TLM) and Encana have all reduced their 2012 capital
budget to minimize investments in development drilling.
On the other hand, Oklahoma-based Chesapeake – the
second-largest U.S. producer of natural gas behind Exxon
Mobil Corp. (XOM) – and rival explorer
ConocoPhillips (COP) have opted for production
shut-ins to cope with the weak environment for natural gas that is
likely to prevail during the year.
However, we feel these planned reductions will not be enough to
balance out the massive natural gas supply/demand disparity and
therefore we do not expect much upside in gas prices in the near
term. In other words, there appears no reason to believe that the
supply overhang will subside and natural gas will be out of the
dumpster in 2012.
ANADARKO PETROL (APC): Free Stock Analysis Report
CHESAPEAKE ENGY (CHK): Free Stock Analysis Report
CONOCOPHILLIPS (COP): Free Stock Analysis Report
DEVON ENERGY (DVN): Free Stock Analysis Report
ENCANA CORP (ECA): Free Stock Analysis Report
HALLIBURTON CO (HAL): Free Stock Analysis Report
HELMERICH&PAYNE (HP): Free Stock Analysis Report
MCGRAW-HILL COS (MHP): Free Stock Analysis Report
NABORS IND (NBR): Free Stock Analysis Report
TALISMAN ENERGY (TLM): Free Stock Analysis Report
ULTRA PETRO CP (UPL): Free Stock Analysis Report
EXXON MOBIL CRP (XOM): Free Stock Analysis Report
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