HardAssetsInvestor

Written by Julian Murdoch  |

March 09, 2009

Cheap Gas

Details

• Low demand
• The importance of rig counts
• Where does it go from here?

Things are rough all over, and today we're going to look at natural gas.

The U. S. Energy Information Administration reports that while there was a drop in natural gas inventories of 102 billion cubic feet for the week ending March 4 due to cold weather and the increase in heating demand that goes along with it, underground inventories are still high. In fact, as the EIA points out, that 102 billion cubic feet drawdown is 19 billion cubic feet lower than the average inventory drawdown at this time of year.

The U.S. is sitting on a whole lot of stored natural gas right now - 1,793 billion cubic feet to be exact - 13.8% more than the five-year average. Keep in mind, this is gas that has been taken out of the ground in one area, processed, transported and then pumped back underground into salt caves and other underground natural gas storage areas. Crazy, isn't it?

And here we sit with spring just around the corner - a time when we usually see a seasonal dip in natural gas prices as the weather heats up and demand drops. At this point, natural gas has nowhere else to go but down ... again.

But even the weather hasn't helped natural gas prices much this year. In fact, from the look of the chart below, you'd think this was an exceptionally warm winter. From the view out my window (and at my thermometer, which read 13 degrees last week), you'd be wrong.

For the past 12 months, the picture looks like this:

Henry Hub natural gas has fallen 70% from a high of $13.27 on July 2 to a recent low of $3.95 on Friday. At this price, many natural gas operations just can't make ends meet, needing prices instead around the $5-$6 mark, or even $8. The bad news may not be over - the Financial Times reported that analysts with Strategic Energy and Economic Research see gas falling under $2 by summer. Would anybody produce gas at that price?