Aug. 3, 2009

Natural Gas Gushing While Rigs Shutdown
How productive has the US natural gas industry become? In a PowerNews newsletter, three weeks ago, we commented on the increased production efficiency of the new natural gas structures. Despite the fact that over 873 natural gas rigs have stopped producing, US natural gas production remains stable with no supply issues. There are currently 677 rigs producing in the US according to the most recent Baker-Hughes Rig Count.

Despite significant rig shut-ins, Chesapeake Energy reported that natural gas production is up 5% this year compared to last year. Southwestern Energy, another giant gas producer, claims that it boosted output by 65% in the second quarter. Southwestern's CEO, Harold Korell, laid the engineering productivity cards on the table during his investor call on July 23:
" Our gross operative production from the Fayetteville shale reached significant milestone of 1 Bcf per day in July compared to approximately 500 million cubic feet per day at this time a year ago. It is truly amazing to think that it was only five years ago when we told the world about the Fayetteville shale play and our gross production from that play alone is now over 1 billion a day."

The rule of thumb with shale deposits seems to be that nominal engineering results are substantially exceeded with improved fraccing technology. This was proven to be true in the Austin Chalk; appears to be true in the Fayetteville shales; and will hopefully be true in our region's Marcellus structure. Long term, this bodes well for the US and provides strong support for using abundant natural gas as a bridge fuel while renewables are developed.

There are energy analysts who are predicting that natural gas will remain below $4.00 per mmbtu through the year. Aubrey McClendon, CEO of Chesapeake Energy, is not in agreement. Here is an excerpt from his investor call on May 6, 2009

"So the next question is what is the case for higher prices from here? The first thing to observe is the most obvious. Today's gas prices are clearly not strong enough to support a North American gas rig count that is high enough to prevent a very severe and unprecedented decline in North American gas production. In fact, our modeling shows that if gas rig counts stay around the 700 mark in the US and the 50 mark in Canada during 2009, that by the end of the 2010 first quarter North American gas production on a year-over-year basis will be about 10% lower and headed further south very quickly.

"Once all of us figure out what L&G imports will look like this summer and once we get a better handle on gas demand trends for the rest of the year, investors will begin focusing on the inescapable reality that by the middle of the winter of 2009 and 2010, North American gas production will likely be in free fall.

"I ask you to consider how many gas market investors will want to be short natural gas in that scenario. My view is, not many.This will set the stage for a dramatic reversal of natural gas prices sometime this fall or winter. In fact, in the gas markets we have come to expect the unexpected in the past year.

"So, if oil prices begin to move toward $60 per barrel and the economy looks like it has bottomed this summer, I wouldn't be surprised to see a movement up in gas futures pricing beginning earlier than most are currently predicting.

"So, how high will gas prices go in the recovery and rebound phase in the next cycle? Obviously, we don't know, but clearly gas prices were too high one year ago at $12 to $13 per Mcf, and today they are far too low at $3.50 per Mcf.

"My guess is the rebound will overshoot on the high side just as it has overshot on the low side, and producers will have to be healed financially for quite some time before they can commit to the capital expenditures needed to stabilize gas production." (Transcript Source: SeekingAlpha.com)

We learned over the weekend that China's manufacturing sector has turned around dramatically (CLSA PMI rose to highest level in a year at 52.8 in June) and now all eyes are on the US. The second quarter US GDP number of -1% surprised many analysts who were expecting a number between -1.7% and -2%. With the ISM Index reporting this morning a +4.1 improvement for the economy to 48.9, the US is just 1.1 points away from trending toward growth as defined by the index. The expectation was 46.5. The downside in the report is that manufacturing did not grow. Natural gas is trading up $0.223 to $3.876 per mmbtu at 9:30 am. with a high of $4.16 per mmbtu. Oil has already topped $70.00 per bbl today in anticipation of a positive report.

Natural Gas Storage Exceeds 3 TCF
Working gas in storage was 3,023 Bcf as of Friday, July 24, 2009, according to EIA estimates. This represents a net increase of 71 Bcf from the previous week. Stocks were 571 Bcf higher than last year at this time and 478 Bcf above the 5-year average of 2,545 Bcf. Roughly 15% of US annual consumption is now in storage, 90-days before the heating season begins.This represents another record storage level for this date.

Natural Gas Market Watch- Intraday Prices Snapshot
Here are the intraday prices on the NYMEX electronic market today (Monday) at about 9:30 AM for the next six months($ per mmbtu, intraday prices):
Sep. $3.876 +0.223
Oct. $4.140 +0.231
Nov. $4.920 +0.264
Dec. $5.601 +0.243
Jan. $5.893 +0.250
Feb. $5.915 +0.232

Natural Gas Futures :
PMC 30-Day, 90-Day, 12-month Natural Gas Futures Chart

Crude Oil Watch
 OPEC Basket Data 

Electricity Watch- Bargain Prices Available
For more information view the Day Ahead Electric pricing data charts from the PMC database, updated every Monday.
 
Weather Trends-
NOAA Forecast for Next Week
8-14 Day forecast
NOAA Forecast- 30-Days

Written and Researched by Martin Linskey; Energy Charts developed by Charles Myers.

Disclaimer: This information is provided for the use of our customers and potential customers. Power Management Company assumes no responsibility or liability for the accuracy or completeness of pricing or information in this document. Historical data was obtained from sources that we believe to be reliable, but we do not guarantee its accuracy or completeness. It is not intended to provide advice or recommendation. Views are subject to change without notice.