Wednesday, March 7, 2012

Natural Gas: Companies Announce Cuts, Traders Not Convinced

Welcome to station K-NAT, all natty all the time.

I apologize for the abundance of methane stories but I'm not going to stop. What's going on right now is a once-in-a-lifetime transformation that makes most other energy stories seem boring.
If you aren't making money off this or, at minimum, thinking about making money off of it, you really aren't trying.
Last I saw, $2.307, down 2%

From Reuters:
Show, don't tell: US natural gas traders question cuts
North American natural gas producers face one big problem as they pledge to cut production to bolster prices: skeptical traders.

Led by No. 2 U.S. producer Chesapeake Energy, companies including Canadian producer Encana Corp and ConocoPhillips have pledged to knock a total of about 2 percent off domestic output.
But with scant evidence of where or how long cuts are being implemented, traders are wary. Natural gas prices are languishing within pennies of a 10-year low hit in January. Traders say prices will likely remain depressed until reductions can be confirmed in company earnings or government data, months from now.
One of the mildest winters on record and an unyielding boom in shale gas production has pummeled natgas futures this winter -- welcome news for U.S. households and industrial users like Dow Chemical but a bane for producers now struggling to break even on thousands of new wells. Substantial cuts could turn that around.

Stockpiles are at record highs for this time of year and without supply reductions they may exceed capacity by the end of the summer. Such an unprecedented event would cause havoc by forcing producers to sell gas at extremely discounted levels, perhaps even to pay for someone to take it off their hands.

So producers have announced swift cuts in supply, reprising a strategy that helped temporarily stem the previous price crash in 2009. But looking back, traders say, those curbs appear to have lacked the impact that they had initially expected.

Chesapeake's production actually rose in the second quarter of 2009 after cuts were announced, as increasing output from new wells more than offset the cuts it made at existing facilities, company data show.
The supply restrictions may have also been relatively short-lived. Chesapeake announced on April 16, 2009 that it would double the size of planned reductions to 400 million cubic feet per day -- about 13 percent of the company's output at the time. Reuters calculations, based on company data, suggest that the closures would have lasted less than a month at that rate.

Now that cuts have been announced again, traders say they want to see the evidence. So far, it's been hard to find.

"The market doesn't think there is a lot of production cutting going on," said Keith Barnett, executive vice-president at Springrock Production which forecasts U.S. natural gas supply.

While natural gas inventories are now declining more quickly than at the beginning of the winter and pipeline flows have fallen in some places, some analysts say the figures do not prove that cuts have hit the market yet. Colder weather has helped drain inventories, and many utilities are now burning more cheap gas instead of costlier coal. Less gas flowing through some pipes can be made up by higher flows elsewhere.

A Chesapeake spokesman said that more than 1 billion cubic feet per day (bcfd) of production had been cut this year by tightening the taps at producing wells, moving rigs to more lucrative oil plays and delaying the connection of freshly drilled wells to pipelines.

In aggregate, Chesapeake, Encana and Conoco, announced plans in the past few weeks to take about 1.35 billion cubic feet per day (bcfd) of output off the 67-bcfd U.S. market....MUCH MORE