Wednesday, October 7, 2009

Natural Gas Price Speculation Continues

Warmer Winter Could Chill Natural Gas
Jesse Bogan, 10.06.09, 05:00 PM EDT
Some battered producers are turning optimistic, but a government forecast suggests little near-term upside.

HOUSTON -- A bump in natural gas prices and lower operating costs are causing some independent exploration and production companies to talk about picking up drilling activity. However, a report from the U.S. government predicting a milder winter than last could dampen producers' spirits, while lifting those who pay utility bills.

Chesapeake Energy ( CHK - news - people ), which produces 2.2 billion cubic feet of natural gas a day in the U.S., said in a recent investor presentation, "It's a great time to drill!" Costs are down 30% to 50% from highs in 2007 and 2008. (The company wouldn't say if it was planning to add more rigs in the near term.)
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Independent exploration and production company CNX Gas ( CXG - news - people ) of Pittsburgh, Pa., says it is training rig crews to boost its position in the Marcellus Shale, a popular unconventional play in the Northeast, once gas prices reach $6 per thousand cubic feet.

Pritchard Capital Partners analyst Ray Deacon said Tuesday that CNX's activity is a "very cogent call on higher gas prices."

Since natural gas prices began their plunge from a peak of $13 in 2008, the number of operating natural gas drilling rigs in the U.S. has fallen from 1,600 to 700 (Chesapeake's rig count dropped from 158 to 101 currently). Storage is nearly full at 3.6 trillion cubic feet. The lack of available storage space partly explains the unusual pricing in the market: The spot price is nearly $3, and November contracts are trading at a $2 premium. (See "Natural Gas Threatens To Overflow Storage.")

A rebound in natural gas prices usually starts in the fall, as storage injections stop and demand picks up for the winter months. "If past cycles are repeated, natural gas could have a significant amount of upside between now and the end of winter," Deacon says. "As the storage overhang is reduced by two-thirds this winter, the upside in natural gas could be greater than many are forecasting."

Pritchard forecasts natural gas will average $6.50 in 2010.

Gene Sheils, who helps track the national drilling rig count at Baker Hughes ( BHI - news - people ), isn't as optimistic. "I think it's too soon to call the absolute bottom," he says of the rig count. Companies will be less likely to add rigs if spot prices remain weak and the winter is mild.

"If we go back into the injection season with still very high levels of natural gas in storage, there could potentially be some weakening of the gas rig count again," he says. "So much depends on the weather."

If the U.S. Energy Information Administration is correct, it won't be good for the natural gas sector. The agency reported on Tuesday that it expects lower heating bills for consumers due to record storage and forecasts that winter in the Lower 48 will be 1% warmer this year compared to last.

It expects household bills for space-heating fuels will be 8% lower than last year, with the average household spending $960 in the October through March winter heating season, a decrease of $84 from last winter.

"The lower bills primarily reflect lower fuel prices, although slightly milder weather than last winter will also contribute to less fuel use in many areas," EIA Administrator Richard Newell said in an announcement. "We expect the largest decreases in fuel expenses in households using natural gas and propane."

The EIA expects spot gas prices to average $4.31 this winter, down from $5.66 last winter. However, with the economy on the mend, it expects the annual average spot price to rise from $3.85 in 2009 to $5.02 in 2010.

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