Natural gas futures up; US inventories not as much as expected

Natural gas  futures were up slightly today when the Energy Information Administration in the US reported that US natural gas inventories did not rise as much as many analysts expected. After the inventory data was released, natural gas futures were up ~18 cents or 5.5%. US natural gas inventories rose 90 Bcf (billion cubic feet) last week, less then the 106 Bcf many analysts were expecting according to a energy information provider Platts. At 2,886 Bcf, US natural gas inventories are 589 billion cubic feet higher than last year at this time and 454 Bcf above the five-year average.

Keeping an eye on the inventory data over July and August is very important. It may be the beginning of the declining inventories that will result from the massive decline in exploration and development activity in the natural gas industry. While companies like Exxon on announcing massive finds in British Columbia’s Horn River basin (HRN: Exxon Mobil hints at world class natural gas discovery in Horn River basin), most companies have reduced exploration budgets overall by 50% or more. These reduced activities are expected to start having an impact on supplies over the coming months, and should be reflected in US inventory levels.

HRN has often stated. Supply falls faster then demand. If you are not replenishing inventories at a equal or greater amount then consumption, inventories will fall and have an impact on the supply/demand equation for prices. Though great discoveries are being made in the Horn River basin and other shale gas plays, the current amount of production from shale gas will be short of the 50%+ reduction in production from conventional sources putting a squeeze on inventories and upward pressures on prices.

Many analysts are looking for natural gas to trade between $6.00 to $7.00 in 2010.