Paramount Energy Trust (TSX:PMT.UN) announced plans to selectively shut in natural gas wells cutting production by about 35 million cubic feet per day adding to the chorus line of major cuts by gas producers in the last few months.
Continued production cuts by major natural gas producers due to lower prices, take time to impact down stream inventories, however, the last three weekly inventory reports in the US indicate a trend of decline. Incoming supplies are coming in at less then expected amounts. The US inventory overall is still above last year’s average and the 5 year US average.
The 35 million cubic feet, or 2.45 billion cubic feet per week, will take some time to take effect. Wells are shut in over time and depending on the number of wells involved in could take several weeks before Paramount would reach their 35 Mcf/day target. The same holds true for others that have announced production cuts months ago, and those cuts are just having an impact now. Hence the supplies coming into inventory in the US are less then expected.
Eventually all these cuts will take effect and have a impact on inventory. Usually it happens a lot quicker then most expect. Once supply is cuts are effective, the inventories will likely start to fall quite rapidly dropping below current (and lower) then average demand for natural gas due to slower economic activity.
At the same time, there are growing indications that the economy is stabilizing and approaching a turn around. In Canada, Mark Carney, the Governor of Bank of Canada, essentially stated the recession was over this past Thursday, and that Canada’s economy will start growing and lead most of the industrialized world next year. Any similar positive news and economic growth in the US would see increased demand for natural gas (not to mention the impact of weather via hot summers or hurricanes).
Again, watch natural gas inventories through August for an indication of all these production cuts taking effect. The end result will be upward pressure on natural gas prices near year’s end, and into Q110.
Canadian Press: Low natural gas price is causing Paramount Energy to shut in some production
