Gas Prices Remain Depressed Despite Production Cuts

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Natural gas futures in the U.S. came close to their lowest levels in a decade as the weekly underground inventory report in the U.S. showed that the decline in storage levels was lower than expected. [1] Front month gas futures fell to as low as $2.23 / Million British Thermal Units (MMBtu) after the report was released.

Gas prices have remained low despite ConocoPhillips (NYSE:COP) and other players like Chesapeake (NYSE:CHK) announcing production cuts. Despite the falling gas rig count, gas production levels have not shown much decline and estimates suggest that production will continue to rise in 2012. We have a $79.93 price estimate for ConocoPhillips, which is in line with the company’s current market price.

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Production cuts

The mild winter weather in the U.S. has constrained demand for natural gas because of reduced need for residential heating. However, low gas prices have led to some increase in industrial consumption because of some utilities switching from coal to gas. [1] Even with rising gas consumption, inventories have stayed at record levels and prices have remained low. Some traders expect prices to fall even further with winter demand set to come to an end, and contractual obligations could force gas producers to cycle gas out of the inventory by March 31st, exacerbating the supply glut.

Some analysts estimate that the announced production cuts from players could cut daily supply by about 1 billion cubic feet per day (Bcf/day). [1] However, the cuts have not yet been reflected in the pipeline flows. While the gas rig count in the U.S. has been declining for the past several weeks, the corresponding drop in supply could lag by several months. Gas production is also being held up by the release of associated natural gas while drilling for liquids. Liquids directed drilling has been rising in North America.

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Notes:
  1. Supply drives U.S. natgas futures to near 10-year low, Reuters [] [] []