The U.S. Energy Department's weekly inventory release showed an
in-line increase in natural gas supplies, as strong requirement for
power burn across most of the country (with more electric utilities
switching from coal to gas) was offset by rising dry gas production
and imports from Canada. In the meantime, the latest injection -
the eleventh in 2012 - has added to already bloated
Gas stocks - currently some 35% 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
However, the most recent build - though as per expectations -
was still significantly lower than the average for this time,
cutting the surplus relative to last year and the five-year
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
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
Devon Energy Corporation
Helmerich & Payne
Analysis of the Data
Stockpiles held in underground storage in the lower 48 states
rose by 71 billion cubic feet (Bcf) for the week ended May 25,
2012, within the guidance range (of 67-71 Bcf gain) as per the
analysts surveyed by Platts, the energy information arm of
McGraw-Hill Companies Inc
However, the increase - the eleventh injection of 2012 - was
lower than both last year's build of 89 Bcf and the 5-year
(2007-2011) average addition of 100 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 2.815 trillion cubic feet (Tcf) - is
still up 732 Bcf (35.1%) from last year and 724 Bcf (34.6%) 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 53% from 2011 peak
of $4.92 per million Btu (MMBtu) in June to the current level of
around $2.30 (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
Ultra Petroleum Corp.
Talisman Energy Inc.
) 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.
) - and rival explorer
) have opted for production shut-ins to cope with the weak
environment for natural gas that is likely to prevail during the
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
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