Commodity Trade Mantra

Lower prices & Higher output may lead to Natural Gas Production cuts.

Natural Gas

Lower prices & Higher output may lead to Natural Gas Production cuts.

U.S. Natural Gas production continues to rise, but prices languish. Despite shift away from dry gas production to oil development and to more liquids-rich gas plays, “associated gas” production continues to be strong. With a very warm winter, surging supplies have kept natural gas storage volumes at market-crushing levels. Power generation is the fuel’s brightest prospect. Even as electricity demand has been flat-to-declining, natural gas has gained market share in the sector, as low gas prices have encouraged fuel-switching. In recent months, natural gas has been increasingly displacing coal for power generation.

Currently, fears that the Natural Gas market might run out of storage capacity paired opposite higher production have put a large pressure on Nat Gas prices. There is a fear globally that this may induce forced shut-ins to balance the market & that may weigh on prices for the rest of this injection season. How much longer can companies continue to produce and sell such a low-priced commodity and keep themselves afloat? But as soon as the market enters the next heating season (November 2012), the fear of forced shut-ins and a collapse in prices will instantly vanish.

By then, theU.S.will possibly be in modest supply decline that accelerates as the market enters 2013. It seems that the market has given up on the idea that supply can ever decline.U.S.production declines could shake the market from its bearish phase. While producers may have other strategies, the sum of drilling cuts to date, plus those committed to by producers, should put theU.S.into modest product decline later this year. Meanwhile, associated gas production growth will be more than offset by the drought in dry gas drilling, barring a rebound in the gas-directed rig count. Thus, with concerns of shut-ins behind it, and production turning over, the market mood should brighten considerably. Gas and coal might possibly race each other towards some sort of a bottom. Gas fundamentals point to more upside than downside risk in 2013.

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