The U.S. Energy Department's weekly
inventory release showed a larger-than-expected increase in natural
gas supplies, as mild temperatures in parts of the country have
restricted the commodity’s requirement for power burn. The
injection – the ninth in 2012 – has added to already bloated
inventories.
Gas stocks – currently some 40%
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. This has constantly pressured spot prices that
slipped to a 10-year low in April.
However, the most recent build –
though above expectations – was still significantly lower than the
average for this time, cutting the surplus relative to last year
and the five-year average.
About the Weekly
Natural Gas Storage Report
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).
Analysis of the
Data
Stockpiles held in underground
storage in the lower 48 states rose by 61 billion cubic feet (Bcf)
for the week ended May 11, 2012, above the guidance range (of 52–56
Bcf gain) as per the analysts surveyed by Platts, the energy
information arm of McGraw-Hill Companies Inc
(MHP).
However, the increase – the ninth
injection of 2012 – was lower than both last year’s build of 86 Bcf
and the 5-year (2007–2011) average addition of 91 Bcf for the
reported week, thereby trimming the surplus relative to the
benchmarks.
But in spite of the ‘below-average’
build during the past week, the current storage level – at 2.667
trillion cubic feet (Tcf) – is still up 774 Bcf (40.9%) from last
year and 773 Bcf (40.8%) over the five-year average.
Due to this huge natural gas
surplus, inventories in underground storage started to climb since
March – weeks earlier than the usual summer stock-building season
of April through October. They have persistently exceeded the
five-year average since late September last year and are likely to
test the nation’s underground storage facilities by fall. In fact,
the EIA foresees natural gas storage at record highs of 4.10 Tcf by
October.
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.
Natural gas prices have dropped
approximately 45% from 2011 peak of $4.92 per million Btu (MMBtu)
in June to the current level of around $2.70 (referring to spot
prices at the Henry Hub, the benchmark supply point in Louisiana).
Incidentally, prices hit a 10-year low of $1.82 during late
April.
To make matters worse, 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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