N/G general market commentary
Natural Gas (NG : NASDAQ : US$3.48), Net Change: -0.13, % Change: -3.52%
The cure to low prices is low prices. Canaccord Genuity Energy Analyst John Gerdes published a note on the current state of
the U.S. natural gas environment. Gerdes commented that the year-over-year storage overhang has eroded from approximately
900 Bcf to less that 200 Bcf largely due to gas-fired power demand that jumped as the price of gas plummeted to $2.00 per Mcf.
Gerdes also noted that the necessity of low gas prices, and corresponding anomalous strength in gas-fired power demand, is
receding, and gas-fired power demand should wane late this year. In 2013, given his $4 natural gas price expectation, he expects
gas-fired power demand to decline approximately 1 Bcf per day. In the wake of extremely weak gas prices, the E&P industry
has cut gas-directed activity to approximately 430 rigs, which is markedly below the 600-700 gas rigs necessary to maintain
market equilibrium long term. Specifically, the gas market is currently over 2 Bcf per day undersupplied on a weathernormalized
13-week, moving-average basis. Gerdes expects U.S. gas supply to remain relatively stable through the remainder of
the year and exhibit modest growth in early 2013 with the completion of gas wells deferred earlier this year. His expectation for
– Canadian and U.S. Comments for Tuesday Oct. 16, 2012 4
This publication is a general market commentary.
the gas rig count to average almost 600 rigs next year is highly optimistic though still results in November 2013 gas storage of
only 3,300 Bcf. Further, without at least a $4 gas price signal and corresponding increase in gas-directed drilling activity,
Gerdes’ November 2013 storage projection could be also overly optimistic. Gerdes expects gas in storage to approximate yearago
levels before year-end, and assuming 15-year average winter weather, exit the 2012/13 heating season approximately 600
Bcf below the prior year levels. If the storage dynamics materialize as displayed, Gerdes noted his $4 gas price forecast next
year clearly has upside bias.