Exxon Mobil (
) announced Monday morning that it will buy XTO Energy (
) in an all-stock deal worth $31 billion as the oil giant moved
aggressively towards the abundant unconventional natural gas source
This deal shows the priority that major producers are giving to
natural gas as a fuel source, and could signal a new rush to own
natural gas assets by other majors. (
Note: XTO was recommended in one of my
articles as a natural gas play
The collapse of the global economy and unfolding credit crunch has
conspired to send natural gas on its fastest decline this year,
hitting $2.41/MMBtu on Sept. 4, the lowest level since late 2001.
Throughout much of this year, natural gas has become an almost
forgotten commodity with poor market fundamentals keeping a lid on
Over the past three months, however, natural gas has fared
considerably better, finishing last Friday at $5.278/mmbtu, near
its 11-month high on news of the first inventory draw in nine
months benefiting from frigid temperatures throughout the country.
[click all images to enlarge]
Gas traders were taking advantage of last Thursday's 8% run-up,
spurred by a surprisingly large drawdown of 64 bcf of U.S. gas
inventories, to sell contracts at relatively high prices.
Natural gas futures have gained about 9% this month, albeit
still down 6% this year. While the price spike shed a ray of light
onto the shale-shocked fuel, analysts are divided whether the price
rise would provide long-term warmth.
Some analysts expect prices bottoming out as the winter wears
on, and production cuts roll in, whereas others see a definitive
bearish outlook citing the still high inventory and new global LNG
capacity. However, weather is weighing prominently at both
Here are some of the facts from the U.S. Energy Information
)) and Baker Hughes Inc. (
) regarding the natural gas market:
- According to the U.S. EIA, despite exceeding market
expectations, the net withdrawals were less than the 5-year
average withdrawal of 90 Bcf as well as below the withdrawal of
66 Bcf for the same period last year.
Inventory Still High
- Even with the larger-than-expected pull from storage, gas
supplies remain ample. Total gas in storage as of Dec. 4 was
still about 16% above the five-year average and 14% above last
Small Production Decrease
- The latest report from the EIA shows a sequential 2% drop in
natural gas production in the lower 48 states. (
) The EIA attributed this to "natural gas plant maintenance,
repairs and shut-ins due to low gas prices". A pipeline
interruption during the month was one of the factors that lowered
- The current Baker Hughes natural gas rig count of 757, though
45% lower year-over-year, is at its highest since April 2009. The
increase in the horizontal drilling activity suggests that
shale/unconventional is a clear industry focus. (
) Barnett, Fayetteville, Haynesville, and Marcellus are some of
the popular shale plays where production is robust and economics
are modestly better.
Coal-to-Gas Switch Increased
- Price competition between coal and natural gas is intense, and
the collapse in Henry Hub price has been reflected in fuel
selection. Based on the EIA latest data, consumption of coal for
power generation in August 2009 was down by 9.1% year-over-year,
while consumption of natural gas increased by 9.9%.
LNG Wild Card
- So far in 2009, lower prices in other main liquefied natural
)) markets coupled with abundant gas storage infrastructure has
pulled LNG cargos to U.S. shores. Through the end of September,
LNG imports are up 38% year-over-year. Fortunately, the LNG
influx coincided with a drop in imports from Canada, or the
current domestic storage level would have been a lot higher.
The continuing influx of LNG demonstrates that massive storage
capacity and a liquid market will continue to make the U.S. the
market of last resort for LNG, even during periods of low prices.
With new liquefaction capacity coming onstream (
), the level of U.S. imports will be contingent upon the arbitrage
in the global LNG markets.
Nevertheless, the current consensus seems to be that the "dark
stormy night of natural gas" has come to pass. Though the fuel
might not get much help from the supply side, the demand side of
the equation certainly looks a lot brighter than 6 months ago.
A weak dollar and a recovering U.S. economy should boost demand
from the industrial sector. The continued growth of wind and solar
energy capacity would require more backup supplies, and natural gas
is by far the most reliable. The government's green initiative is
also positive for the natural gas as it is a cleaner fuel option.
A colder winter forecast, a recovering U.S. economy and the
alternative energy push all are favorable signs that some of the
excess inventory could get burned off, thus igniting the depressed
natural gas market. On that note, natural gas should be able to at
least maintain the current
with some potential upside to the
$6 - $8 range
next year, depending on the pace of our economic recovery and, of
course, weather condition.
A record 408,214 natural gas futures contracts traded last Thursday
on the CME Group Inc.'s Globex electronic system and on the floor
of the NYMEX, according to data compiled by Bloomberg.
Other technical indications are also bullish. For example, the fast
average is above the slow average and price is above the moving
average. So, there could be some more technical upward momentum
during this winter season.
More Industry M&As?
The Exxon-XTO deal could prompt further consolidations as Exxon
Mobil is generally regarded as the industry leader and trend
setter. Most oil majors like Royal Dutch Shell PLC (
), BP BLC (
) or Chevron Corp (
) typically do not possess as much technological expertise in
unconventional gas as the pure E&Ps, and would most likely look
to acquire the independents under the current more favorable
Natural gas weighted E&P companies such as Devon Energy (
), Chesapeake Energy (
) and EOG Resources (
) could be potential targets.
Close to the Bottom
& Non-Dollar Reactive
Although natural gas has underperformed almost everything else in
the market this year, it is probably the only asset class where
investors may still get in close to the bottom in light of the
market run-up this year.
Last week also marked the first time since October that oil fell
below $70/b, partly reacting to the dollar strength, while natural
gas moved in the opposite direction. This illustrates one unique
characteristic of natural gas - it does not react to the movement
in dollar like other commodities, such as crude oil or gold, do.
With the dollar seemingly staging a comeback from an oversold
situation, and the general expectation of higher interest rates
next year, allocating a portion of a portfolio in investment
vehicles related to natural gas producers and/or land drillers
could prove to be a logical and prudent move.
While futures-based commodity ETFs such as United States Natural
Gas Fund (
) may look like an obvious option, I will reiterate caution against
this type of investment due to volatility and transparency, among a
number of other concerns.
Disclosure: No Positions
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