Tuesday, May 12, 2009

Commodities: Natural Gas Outlook

[Rigzone] -- Natural Gas Prices and LNG's Dirty Little Secret, by Allen Brooks

Optimism about the ending of the U.S. recession and its impact on future demand for natural gas coupled with positive comments from large domestic gas suppliers about the trend in gas supplies has ignited a rally in natural gas futures prices during the past week. Natural gas prices jumped from a low of $3.25 per thousand cubic feet (Mcf) on April 27th to a recent high of $4.31 per Mcf last Friday. A near 33% rise in gas prices in such a short time-period reflects a severely oversold market. The dramatic price run-up may have more to do with commodity short-sellers than people buying into the view of a sustainable and healthy recovery for the market.

There were several very positive statements made by the CEOs of major natural gas producers about the changing supply/demand dynamics of the business on their company earnings conference calls with analysts. Mark Papa, CEO of EOG Resources, Inc. (EOGNYSE), said he expects the impact from the decline in gas-oriented drilling will result in natural gas production falling by 4.5 billion cubic feet per day (Bcf/d) by the end of the year.He believes the resulting North American natural gas production declines could be reversed by early in 2010 if $7 per Mcf gas prices return or the gas-directed rig count falls below 650. This view compares with that of the Petroleum Industry Research Association (PIRA) that believes gas production will be 3 Bcf/d lower at year end.

Equally bullish was Aubrey McClendon, CEO of Chesapeake Energy (CHK-NYSE), who sees gas storage being full by October and that gas production would be 10% lower at year-end compared to 2008. That implies natural gas production should fall by 4 Bcf/d. Should these estimates prove accurate, the supply drops would go most of, if not all, the way to wiping out the perceived supply/demand imbalance in the domestic gas market of about 5 Bcf/d due to the falloff in industrial and commercial consumption related to the economic recession and credit crisis.

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