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THE NATURAL GAS REBOUND IS NOT YET SUSTAINABLE…

By Robert Balan, Sr. Market Strategist, Diapason Commodities

  • Natural gas prices hit their lowest price levels since 2002 during the current decline at $2.289 in the March contract but has recovered by as much a 18.5% since Monday after Chesapeake Energy Corporation (the US’ second largest natural gas producer) said it will reduce dry gas drilling activity and production with immediate effect.
  • The price reversal looks dramatic, but what can we reasonably expect for natural gas prices development from here? The answer is not straight-forward, but net-net, Chesapeake’s cutbacks is a very good start, and this may indeed the beginning of a stability for natural gas, but much more has to be done by producers to prevent prices from sliding further.
  • There remains no clue as to when balance will be back in this market, so there are other good reasons to be cautious about the recent large rebound in prices in the U.S. We do not believe that we have seen the bottom in gas prices this year. Stabilization, yes, but absolute trough — perhaps not yet. Conditions for gas investment may be better by mid-year.
  • Other companies may announced drilling cuts in the coming months if prices do not rebound to more healthy levels (around $4 per million Btu). Encana, the U.S. fifth largest producer, is likely to be the next to announce drilling cuts.

Read the full report below:

diapcap_26January2012_pragcap

 

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