Natural Gas Supplies Remain Robust - Analyst Blog

The federal government’s Energy Information Administration (EIA) reported an in-line increase in natural gas supplies. Stockpiles held in underground storage in the lower 48 states rose by 76 billion cubic feet (Bcf) for the week ended May 14, 2010.

The inventory addition was lower than the five-year-average injection of 93 Bcf and last year’s build of 100 Bcf, thereby trimming the surplus. The current storage level, at 2.17 trillion cubic feet (Tcf), exceed last year’s level by 73 Bcf (3.5%) and remain 308 Bcf (16.6%) above the five-year average. This is clear from the following chart from the EIA.

Working Gas in Underground Storage Compared with 5-Year Range

Note: The shaded area indicates the range between the historical minimum and maximum values for the weekly series from 2005 through 2009.

Source: Form EIA-912, “Weekly Underground Natural Gas Storage Report.” The dashed vertical lines indicate current and year-ago weekly periods.

Natural gas stockpiles have exceeded the five-year average for this time of year in each of the three storage regions for the last nine weeks. However, the most recent injection ended this trend, marking the first week-over-week decline in the five-year average since the week ended March 12, 2010.

Yet natural gas supplies remain above the record levels established in 2009 and are currently at historical highs for this time of year. Moreover, the latest weekly report, which showed an increase in natural gas in storage at the lower end of expectations, was largely on account of higher-than-normal temperatures rather than a shift in underlying fundamentals.

The specter of a continued glut in domestic gas supplies still exists, with storage levels remaining 17% above their five-year average. Following the end of the three-month cold snap (from December ‘09 through February ’10), there has been a significant reduction in space-heating demand.

Further pressurizing the commodity is the rapid rise in the number of drilling rigs working in the U.S. (the natural gas rig count has climbed 46% from a seven-year low reached last July) that signals a supply glut later this year in the face of sluggish industrial demand. Meanwhile, production from dense rock formations (shale) remains robust and demand from power plants remains soft.

There are concerns among traders that the market will be oversupplied in the short- to medium-term, with rig counts going up and industrial demand still struggling due to the weak economy. These factors translate into limited upside for natural gas-weighted companies and related support plays. Given the depressed state of the commodity, natural gas prices have dropped to around $4.00 per million Btu (MMBtu), after attaining this year’s peak of $7.51 per MMBtu on January 7 (referring to Henry Hub spot prices).

Considering the bearish fundamentals, we maintain our cautious stance on natural gas-focused E&P players such as EOG Resources (EOG), Anadarko Petroleum Corp. (APC), Chesapeake Energy (CHK) and Devon Energy Corp. (DVN).

Additionally, we remain skeptical on land drillers such as Nabors Industries (NBR), Patterson-UTI Energy (PTEN) and Helmerich & Payne (HP), as well as natural gas-centric service providers such as Halliburton Company (HAL). Although we expect the land rig count to continue with its steady rise during 2010, the large amount of excess capacity in the sector will weigh on dayrates and margins well into the year.

Oil majors like BP Plc (BP) that have significant natural gas operations are also expected to remain under pressure until pricing and demand improve further.

Natural Gas Supplies Remain Robust – Analyst Blog

SIGN UP TO NEWSLETTER

Free E-Book

Recent Posts