Natural Gas Prices Supressed on High Inventories Despite Production Cuts

COP: ConocoPhillips logo

Natural gas prices in the U.S. dropped by almost 6% after an EIA report showed that underground inventories showed a smaller than expected fall over the past week. [1] Inventories continued to remain at levels higher than normal for this time of the year despite announcements from energy major ConocoPhillips (NYSE:COP) and other producers that they would cut back production in the U.S. because of weak pricing. Natural gas prices fell to their lowest levels of the past decade this winter as a surge in production from shale plays coincided with an unusually mild winter in North America. Gas production in the U.S. finally showed signs of slowing in December, when monthly production finally showed its first decline since February 2011. Chesapeake Energy (NYSE:CHK), the second largest gas producer in the U.S. also announced production cuts going ahead. We have a $79.93 price estimate for ConocoPhillips, which is at a slight premium to its current market price.

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High inventory

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Underground inventory of natural gas in the lower 48 states stood at 2,513 Billion cubic feet (Bcf) at the end of last week, 45% higher than the 5-year closing average level for the same week. [2] High inventory levels have led to a downward pressure on natural gas prices in the U.S., where ConocoPhillips produced close to 40% of its global gas output in 2011. [3] The company announced a few weeks ago that it would cut back on production in the country in light of the weak prices. EIA data shows that gas production showed a slight decline of 0.2% in the month of December, [1] signalling that weak margins were finally dampening the shale boom. Gas prices have also been pushed down by the fact that the winter is coming to an end and that forecasts suggest that weather conditions in most parts of the country will higher than normal for this time of the year.

A significant fraction on natural gas demand comes from residential heating. The mild winter in the country has lowered the gas ‘draw’ from underground storage facilities in the past winter. Weak gas prices may impact the Q1 results of energy majors like ConocoPhillips.

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  1. Natural-Gas Prices Sink, WSJ [] []
  2. Weekly Natural Gas Storage Report, EIA []
  3. ConocoPhillips 2011 10K, SEC []