Natural gas lost 72% in 11 months as the we went into the deepest recession in 50 years. Production companies scrambled to shut in production to control inventories, and shale gas discoveries brought new sources of natural gas onto the market.
According to the US Energy Department, inventories are 22% higher then the 5-year average and oil costs 18 times more then gas representing the largest gap since 1992. History indicates that natural gas prices will appreciate and narrow the price ratio to oil gap providing yet another indicator for a natural gas rally.
Over the last couple weeks more and more analysts have been indicating that shut in production (conventional) is reducing supplies and we will see an impact on inventories right when natural gas is going into Q3, which is historically the best performing quarter of the year for natural gas.
Just a month ago, CNQ announced plans to cut drilling activity by 50%. In Q1, the Company had drilled 70 wells, and was planning another 70 for the rest of the year compared to the 280 wells CNQ drilled in 2008. And they are not alone. In Alberta alone, the number of active drilling rigs is only about 32%.
Hot summers and hurricanes often put upward pressure on natural gas prices in Q3. Though the weather can be as unpredictable as the stock market the fact is that this summer will bring warmer weather, and there will absolutely be some hurricanes.
Here on the Horn River News we have spoke often about the implications and timing of the lagging effect of shutting in production. As a decline in production starts to have a downward effect on supply, inventories will begin to decline as well. Inventories will in fact fall faster then demand even if this demand is still in decline. Meanwhile we have seen the economy is showing some very early signs of recovery. If the economic slowdown starts to ease, or if – and we stress if – we had a flat 0% growth rate rather then a negative number the price of natural gas could excellerate given the decline effect of shut in production and delcining inventories. Producers would again scramble to catch up to restore inventory levels and any increase in production would take perhaps several months to work its way into the system.
It appears that the natural gas prices are playing out much as expected and most are stating a rally in natural gas prices will be towards $7.00 by the end of the year. A number supported by most analysts including Tristone Capital of Calgary, and CIBC World Markets who have both recently released reports advising clients to invest in natural gas stocks. See Horn River News: “ The time to buy natural gas stocks is now“.
According to Mr. Ben P. Dell, energy analyst with Bernstein Research in New York:
“The scope for gas to rally before the end of the year is bigger than for oil. The gas market is playing out as expected. Supplies are getting drastically reduced because of falling rig counts and demand is showing signs of stabilization”.
Bloomberg: “Natural gas cheapest to oil since 1992 signals gain”
