The U.S. Energy Department's weekly inventory release showed a
larger-than-expected increase in natural gas supplies, as demand
from power utilities declined. The latest injection – the twelfth
in 2012 – has added to already bloated inventories.
Gas stocks – currently some 32% 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 62 billion cubic feet (Bcf) for the week ended June 1,
2012, above the guidance range (of 53–57 Bcf gain) as per the
analysts surveyed by Platts, the energy information arm of
McGraw-Hill Companies Inc (MHP).
However, the increase was lower than both last year’s build of
81 Bcf and the 5-year (2007–2011) average addition of 99 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 2.877 trillion cubic feet (Tcf) – is
still up 713 Bcf (32.9%) from last year and 687 Bcf (31.4%) 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 54% from 2011 peak
of $4.92 per million Btu (MMBtu) in June to the current level of
around $2.25 (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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