Stockpiles Pressuring Natural Gas

Growing Stockpiles Weigh on Natural Gas Prices

The Energy Information Administration (EIA) reported today another 100 billion plus addition to natural gas stockpiles, highlighting the commodity's weak supply-demand fundamentals. Continued strength in domestic production despite the massive retrenchment in drilling activities from last summer's peak level and recessionary industrial demand has resulted in a major storage overhang.

As this chart from the EIA clearly shows, natural gas in storage has reached approximately 2.4 trillion cubic feet, which is up 30.3% from last year's level and 21.8% above the five-year range.



As a result, natural gas has been a less-than-enthusiastic participant in the ongoing market rally, left far behind by crude oil. This is clear from the nearby chart plotting the NYMEX front-month oil and natural gas contracts since the start of the current rally in Feb'09. Year to date, oil prices are up roughly 60%, while natural gas prices are down in excess of 30%.

 

Continued strong domestic production and recessionary consumption, particularly in the industrial sector, are at the core of the commodity's current woes. The supply picture is expected to reverse in the coming months as the lagging effect of the sharp drop in domestic drilling activity takes effect. Partly offsetting the production drop is the expected ramp up of LNG imports this year.

We continue to favor select E&P players, such as EOG Resources (EOG - Analyst Report), XTO Energy (XTO) and Chesapeake (CHK - Analyst Report) to play the natural gas sector. These companies have access to resource-rich assets, have attractive hedges in place and can profitably operate in a low-price environment.

We remain wary of land drillers, such Nabors (NBR - Analyst Report), and natural gas centric service providers such as BJ Services (BJS), given the extent of excess capacity in the sector that is expected to weigh on dayrates and margins well into next year. As such, we remain unconvinced of the sustainability of recent gains made the land drillers and other onshore U.S.-centric service players.

Read the full analyst report on EOG

Read the full analyst report on XTO

Read the full analyst report on CHK

Read the full analyst report on NBR

Read the full analyst report on BJS