TLM

The U.S. Energy Department's weekly inventory release showed a lower-than-expected drop in natural gas supplies, as warmer-than-normal temperatures across the country have restricted the commodity’s requirement for power burn. In fact, gas stocks – currently some 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 80 billion cubic feet (Bcf) for the week ended March 2, 2012, below the guidance range (of 82–86 Bcf draw) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Companies Inc (MHP).

The decrease – the fifteenth consecutive withdrawal of the 2011-2012 winter heating season after stocks hit an all-time high in mid-November – is also lower than the 5-year (2007–2011) average drawdown of 92 Bcf for the reported week though it exceeds last year’s draw of 63 Bcf.

As a result of the less-than-expected shrinkage during the past week, the current storage level – at 2.433 trillion cubic feet (Tcf) – is now up 739 Bcf (43.6%) from last year and 792 Bcf (48.3%) 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 more than 50% from 2011 peak of about $5.00 per million Btu (MMBtu) in June to the current level of around $2.30 (referring to spot prices at the Henry Hub, the benchmark supply point in Louisiana). Incidentally, prices hit a 10-year low of $2.23 in late January.

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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