Natural Gas (NG : NASDAQ : US$3.85), Net Change: -0.15, % Change: -3.67%, Volume: 161,816
Dang! The price of natural gas fell sharply after the EIA data showed an unexpectedly large build of 111 bcf in natural gas
stockpiles. Consensus estimates had been calling for a build of 100 bcf. The larger than expected build was primarily due to
colder than normal late spring weather in the eastern seaboard. The price of natural gas has staged a solid rally in the past six
months underpinned by a cold winter and slowing production growth in the U.S. Canaccord Genuity’s energy team recently
published a bullish note on natural gas calling the current price around $4.00 as fundamentally supported and seeing future gas
prices potentially being above $5.00 by 2014. Reasons for the bullish stance include recent data which shows increasing
evidence of notable U.S. gas supply erosion, partly attributable to winter operating challenges, though it is also reflective of
organic production declines. The energy team noted that the supply/demand gap has closed. Per the EIA, natural gas demand
over the past year (25.6 Tcf) has now surpassed total supply (25.5 Tcf). Therefore, if growth in natural gas demand continues to
surpass growth in natural gas supply, a supply deficit will open up and push prices higher. Also supportive of the price is
drilling activity which in the wake of extremely weak gas prices, cut natural gas-directed drilling by almost 60% to less than
400 rigs recently, which is solidly below the ~575 gas rigs necessary to maintain long-term market equilibrium. But what is very
noteworthy is that when supply-discipline cycles kick in, they last about two years if the 2007-08 and 2010-11 episodes are any
guide. Therefore, the energy team believes a “discipline-induced” supply deficit should build this year. Energy companies that
are poised to profit from a better gas price include big cap Encana (ECA) and Talisman (TLM), intermediate’s such as Peyto
Exploration (PEY), Bellatrix Energy (BXE) and Birchcliff
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