Natural Gas Storage Still Abundant - Analyst Blog
March 16 2012 - 11:11AM
Zacks
The U.S. Energy Department's weekly inventory release showed a
larger-than-expected drop in natural gas supplies, as imports from
Canada declined. However, this is largely seen as a one-off shot,
with warmer-than-normal temperatures across most of the country
restricting the commodity’s requirement for power burn.
In fact, gas stocks – currently 45% above benchmark 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
fell by 64 billion cubic feet (Bcf) for the week ended March 9,
2012, above the guidance range (of 56–60 Bcf draw) as per the
analysts surveyed by Platts, the energy information arm of
McGraw-Hill Companies Inc (MHP).
The decrease – the sixteenth consecutive withdrawal of the
2011-2012 winter heating season after stocks hit an all-time high
in mid-November – is higher than last year’s draw of 60 Bcf though
it was unable to match the 5-year (2007–2011) average drawdown of
79 Bcf for the reported week.
However, notwithstanding the healthy shrinkage during the past
week, the current storage level – at 2.369 trillion cubic feet
(Tcf) – is now up 735 Bcf (45.0%) from last year and 807 Bcf
(51.7%) over the five-year average. With this huge and sharply
widening natural gas surplus, inventories in underground storage
are likely to end the winter close to their highest level 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 55% from 2011 peak of $4.92 per million Btu (MMBtu)
in June to the current level of around $2.25 (referring to spot
prices at the Henry Hub, the benchmark supply point in Louisiana).
Incidentally, prices hit a 30-month low of $2.07 earlier this
week.
To make matters worse, mild weather across most of the country
have curbed natural gas demand for heating all winter, indicating a
grossly oversupplied market that 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
PATTERSON-UTI (PTEN): 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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