Nat Gas Stocks in Record Territory - Analyst Blog
31 March 2012 - 2:30AM
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. In fact, the second
injection of 2012 and the largest ever for March, has added to the
already bloated inventories.
Gas stocks – currently some 59% 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 57 billion cubic feet (Bcf) for the week ended March 23,
2012, above the guidance range (of 43–47 Bcf gain) as per the
analysts surveyed by Platts, the energy information arm of
McGraw-Hill Companies Inc
(MHP).
The increase – the second injection of 2012 – is well above last
year’s build of 7 Bcf and the 5-year (2007–2011) average addition
of 8 Bcf for the reported week.
As a result of last week’s stock build, the current storage
level – at 2.437 trillion cubic feet (Tcf) – is now up 816 Bcf
(50.3%) from last year and 900 Bcf (58.6%) 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. 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 56% from 2011 peak of $4.92 per million Btu (MMBtu)
in June to the current level of around $2.15 (referring to spot
prices at the Henry Hub, the benchmark supply point in Louisiana).
Incidentally, prices hit a 30-month low of $2.01 earlier in
March.
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
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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