Market Report: Natural Gas Down Again

Down again, naturally. Natural Gas retreats after what should have been a bullish supply injection report, in a move that seemed to define the mood in the rest of the of the petroleum and metals complex. As we all know, natural gas put in an explosive bottom after hitting seven and a half year lows in what seemed to be an effort to catch up with the rest of commodity world. Yet when you find that bullish injection is not quite bullish enough, it possible that we have hit a short term top. Is the reversal in gas a sign that perhaps all the commodities are running out of gas?

Well to find the answer to that question you should really look hard at the reasons why natural gas bottomed and why natural gas gave up its gains after a very bullish report. How bullish was it? Well based on expectations it was very bullish. According to most surveys the natural gas injection was supposed to come in somewhere in the area of 77 billion cubic feet. Yet the injection was much smaller than that. The EIA showed that supplies increased by 66 billion cubic feet up 1.9% from the week before. Yet after a brief pop the market reversed.

Maybe the market priced in all the news or maybe it decided to focus not on the weekly gain but step back and focus on the big picture and the incredible supply. Supplies of working natural gas stands at an incredible 3.470 trillion cubic feet which is 16.4% above the five year average as we head towards what should be record storage going into winter. These numbers stagger the imagination and you might think that anyone who was bullish should be questioning their sanity. Despite strong industrial production and manufacturing numbers industrial demand has been weak.

Still remember that when it comes natural gas it is not just about supply but about production too. And the bulls will tell you that natural gas was just too cheap. In the winter, gas in storage is used when current production is not enough to meet peak demand. As the winter goes on those supplies go down. If prices get too low and production falls too far, we will use supplies in storage more quickly. If you get a cold winter supplies could get tight despite having record storage.

Natural gas bulls seemed to jump on a return to falling natural gas rig counts and signs from other producers that $2.50 gas in September was not high enough to inspire enough production to get us through the winter. A big natural gas exporter in Canada expects that production might be down for some time. Reuter's news reported that Canadian natural gas supplies are likely to fall 17 percent in the next two years as oil companies cut back on drilling activity due to low prices. The National Energy Board said drilling in Canada and the United States has slowed to about half the level of previous years, which will mean sharp declines in conventional production. The US outlook is also lower. The US Department of Energy predicted that natural gas production would fall by 0.9 percent this year and 3.5% next year. A huge drop in production that bulls worry could accelerate if prices fall too fast.

Yet at the same time onshore production is soaring. Shale gas and new drilling technologies have made production much cheaper and somewhat less sensitive to price as it was a few years ago. And if you are going to worry about natural gas supplies going into winter, then September is the month to do it. Natural gas prices generally bottom in September.


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M. Robert Paglee | Sep. 21, 2009
With oil selling at around $70/Bbl, nat gas, on a BTU-equivalency basis, should be selling for around one-sixth of that, which would be at least $10 instead of less than $4. Are producers who aren't locked up with delivery-volume contracts sensibly rotating their shut-in valves a little bit?


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Brent Crude Oil : $49.98/BBL 1.59%
Light Crude Oil : $49.18/BBL 1.56%
Natural Gas : $2.73/MMBtu 1.44%
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