HardAssetsInvestor

Written by Sumit Roy  |

May 03, 2012

With NatGas Hitting Bottom And Supplies Tightening, Prices Poised To Hit $3

Details

Has the natural gas market turned the corner? We examine the latest outlook.

Evidence of declining output in the United States sent natural gas prices surging close to 25 percent over the past two weeks. In its latest survey of producers, the Energy Information Administration said that gross output of natural gas in the U.S. fell by 420 mmcf/d in February, a notable one-month decline in the face of recent record production.

On the surface, this data point looks bullish. Perhaps finally, the decline in natural gas drilling and investment is filtering into output levels, and this is the start of the long-awaited downtrend in production.

But on closer inspection, whether that is the case is not clear. Output fell by 1.27 bcf/d in February 2011, only to rebound swiftly in subsequent months. Temporary, cold weather-related declines in output are not unheard of during the peak of winter.

Secondly, many firms began shutting in production during January and February, after prices plunged below $3/mmbtu. Chesapeake Energy alone announced plans to immediately curtail 0.5 bcf/d of output on Jan. 23.

Whether a sustainable downtrend in production has begun remains to be seen, but clearly, the traders are opting to buy first and ask questions later.

NATURAL GAS

Yet while the outlook for production remains unknown, what is certain is that the natural gas market has tightened. Today’s inventory report from the EIA is evidence of that. Storage operators injected only 28 billion cubic feet into storage last week, well below the 72 bcf of last year and the 82 bcf five-year average.

What is causing this significant tightening of the market? Coal-to-gas switching.