GAS MARKETING REPORT

Last updated 07/14/2010

Market Commentary: The bullishness this market had experienced back in the first half of June is now an event of the seemingly distant past, and prices have trended steadily lower since testing the 5.20 mark several times in the middle of June, attempts which ended in failure in each case.  The market had run up on concerns about intense heat and early tropical activity, with June finishing up to be the hottest on record on a population weighted cooling degree day basis, and we also had our first named storm in the Gulf of Mexico, Hurricane Alex, and having a hurricane in June was also a statistical anomaly.  Those factors along with improving economic data and the long awaited uptick in industrial demand helped get things moving back to the upside once again, but the old adage that the best cure for high prices is high prices came to light, with the increase in prompt prices stealing away much of the demand that had fueled the rally to begin with.  Higher prices for gas caused utilities to decrease coal-to-gas switching for power generation, and as demand has faltered underground storage has once again begun to trend higher, with last week’s reported build of 78 Bcf on the upper end of expectations, and this build represented the most bearish storage injection of the season as it was nearly 2.5 Bcf/day bearish year over year adjusted for weather.  Just as is the case during the winter heating season, as the summer wears on and the ability of existing stockpiles to absorb even the most intense bout of remaining weather that mother nature can throw our way increases, the price response to intense heat or even to intense hurricanes becomes more muted as the season drags on, so we should probably instead be looking toward the supply side of the equation for answers.  Producers are all incentivized to produce as much gas as they economically can in order to best serve their shareholders, and many have hedge programs in place that minimize the impact of the spot market on their individual bottom lines, even though the net effect to the aggregate natural gas market of this “tragedy of the commons” production scenario for producers as a group is anything but negligible.  As hedges begin to roll of, however, with futures markets remaining at depressed levels companies will be forced to make drilling decisions based on the prevailing economics at that time, and production curtailment is likely given the unfavorable price environment in which we now find ourselves.  The decision by many E&P companies that have traditionally focused on natural gas to instead shift to the more profitable petroleum liquids plays and liquids-concentrated shale plays is evidence of this phenomenon, and such substitution away from the now less profitable natural gas segment of the industry is likely to continue as long as the current price environment persists.  With the number of US rigs looking for gas remaining at 950 and well above the level needed to maintain production at a constant rate (which is estimated between 850 and 900 rigs), this market is likely going to need signs of slowing production in order to stage a bona fide attempt at recovery without a major uptick in demand.   

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