Tuesday, November 23, 2010

"Natural Gas: Better Days Ahead (in Two Years)" (UNG)

I haven't posted much on natgas as the price vs. fundamentals has me somewhere between befuddled and bemused.
Here's EconForecast:
Natural gas posted the first weekly increase this month in the week of Nov. 14, on forecasts of colder than normal temperatures in most of the eastern U.S. from Nov. 24 through Nov. 28, which could spur an average 20 percentage rise above the normal heating demand.

Natural gas for December delivery—down 25 percent this year—gained 9.6 percent in one week to settle at $4.164 per Mmbtu on the NYMEX.

Temporary Seasonal Strength

However, this temporary seasonal strength does not alter the fact that U.S. gas stockpiles climbed to an unprecedented 3.843 trillion cubic feet in the week ended Nov. 12—9.3 percent above the five-year average level and 0.3 percent above last year’s level. (Fig. 1)

This storage glut has pushed U.S. natural gas at Henry Hub to its cheapest level in 11 months relative to Canadian gas (at 5 cents below), based on Bloomberg data. Henry hub benchmark has been traded at an average of 85 cents premium to the Canadian benchmark AECO for the past 10 years.

Drowning in Natgas?

As I said before that we are literally swimming in crude oil amid high inventory; but when it comes to natural gas, “drowning” would be a more appropriate description. While crude was hammered by China’s efforts to curb inflation, natural gas has an even bigger problem--nowhere to go--since it is region bound, and not as widely traded.

Worse yet, the latest short-term outlook published on Nov.9 by the Dept. of Energy estimates natural gas production will rise in 2010 to the highest level in 37 years. Marketed natural gas production is forecast to increase by 2.5 percent this year, and fall by 1.2 percent in 2011.

However, the drop in 2011 is not because of a decrease in shale gas production, but mostly a result of a 13.5-percent production decline in GOM production from the 2010 drilling moratorium.

Shale Surge

U.S. has seen a surge in natural gas output in the past two years (Fig. 2) with an increase in gas drilling from shale formations (Fig.3). During this time frame, the market equilibrium is distorted mostly by drilling activities supported through joint ventures with foreign oil majors and national oil companies (NOCs), held by production lease (drill or lose), and producers’ favorable hedging positions.

Gas Rig Count Has To Drop

Some industry experts estimate that gas rig count needs see as much as 20% drop--to around 750—from the current 936 (as of Nov. 19) in the next 12 months just to keep production from growing....MORE
HT: Investment Postcards from Cape Town