GAS MARKETING REPORT
Last updated 02/01/2012
The news-driven rally from last week’s trading turned out to be little more than a fierce bear market rally, with the reality of the supply/demand balance coming back into light this week after the initial barrage of production-related announcements out of natural gas E&P names last week sent shorts rushing for the exits en masse and prices moved up sharply. Friday’s termination for the Feb contract saw a push higher after some of the air had come out of the rally we had seen heading into Thursday’s storage number, with Feb futures posting a final settle of 2.678 which was +7.3 cents from Thursday but was down 40.6 cents from the prior month’s settle for Jan ‘12 and was down nearly 1.64 from the settle for the Feb ’11 contract last year and is the lowest monthly settlement we have seen since the early part of 2002. While the likes of Chesapeake, Occidental, Conoco Phillips, and Consol all announcing cuts to their dry-gas drilling programs in the face of rock-bottom prices, production is at an all-time high and the bulk of production growth is coming from liquids-focused drilling which is still solidly profitable and not likely to be curtailed unless liquids prices begin to retreat as production soars. Executives at Conoco Phillips noted this phenomenon and said that of their 2.5 Bcf/day of NG production in Q4, two-thirds contains enough liquids content to make it profitable, and at this time they only plan to shut in 100 million cubic feet per day, which in addition to Chesapeake’s 0.5 Bcf/day only amounts to a fraction of what the Lower 48 states are producing. In the latest EIA-914 report for November, gross withdrawals were +1.3% or 0.92 Bcf/day to a record-high 72.6 Bcf per day which was up from an upwardly revised figure in October. Not only is supply breaking records with few signs of letting up in the near term, but demand has been decidedly lacking as we’ve experienced the second warmest winter on record thus far, and the first graphic from the EIA illustrates that phenomenon with the blue bar representing normal Heating Degree Days (HDD’s) over the last 30 years by region, with the red bar showing the amount by which this year’s HDD’s have fallen short. The HDD shortfall is causing storage withdrawals to come in well behind historical comparisons, with the growing storage surplus illustrated in the second graphic, also from the EIA, with the red line representing this year’s storage, while the grey area below shows the previous 5-year average, so we are in uncharted territory storage-wise, and estimates for the end of winter carryout are now as high as 2.2 Tcf which would be a new record to start the injection season, and most models are now forecasting storage to peak north of 4.1 Tcf at the end of October and that would test the limits of storage capacity, which have been stated to be 4.103 Tcf by the EIA. Finally, the last graphic from the EIA shows the 5-year range of prices from 2006 - 2010 in grey, then the blue line shows spot Henry Hub prices for 2011 with the red line below showing year-to-date spot prices for 2012 which are noticeably lower than last year. While the announcements out of several of the major E&P names caught some weak shorts off guard and generated a major short-term price response, the supply issues that have gotten us to 10-year lows to begin with have not been eliminated as yet, and the market will look for evidence that supply is responding to pricing cues before things are likely to get turned around for the long-run.
The information herein has been obtained from sources considered reliable, but is not guaranteed, and it, together with all estimates and forecasts is subject to change without notice. This report does not purport to be a complete analysis of the instruments discussed, nor industry, and is not an offer or solicitation of offers to buy or sell any financial instruments.
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