Monday, January 23, 2012

Today's Major Market Move: Natural Gas Futures Jump Over 13% in Today's Session

It hasn't been very long since we last featured Natural Gas in our Major Market Move post (see 1/11/2012) but one can't help but take notice when a financial entity rises 13% on an otherwise calm trading day. NatGas futures have been dropping like a rock since December and as we referenced in that 1/11/2012 post, the stock price of Chesapeake (ticker: CHK) has been dropping with it. So it comes with little surprise that Chesapeake is the first company to announce that it is cutting production. From the Wall Street Journal:
Chesapeake said it will immediately curtail 0.5 billion cubic feet a day of gas production, reflecting about 8% of its total output. The company said it could cut production by another 0.5-billion cubic feet a day "if conditions warrant."

The company will also reduce dry gas drilling activity to about 24 rigs by the second quarter, down by nearly half from 47 dry gas rigs it currently has in use.

Chesapeake is just one producer out of many, and its immediate production cut affects less than 1% of total U.S. gas output of 80.1 billion cubic feet a day. But the move sends the signal that producers are willing to take steps to address the natural-gas glut that has depressed prices for months, analysts said.
As the cuts only represent less than 1% of total US gas output (and of course even less a percentage of global output), today's announcement doesn't exactly warrant a 13% one day move. But the market, being the forward looking animal that it is, expects cuts to be forthcoming from other producers.

Here's the most recent chart of front month natgas futures:

Click here to go to the live chart.
Chesapeake finds itself in the midst of a very interesting chess match at the moment. The market surges 13% because CHK announces cuts and who benefits the most? CHK's competitors, that's who (e.g. EQT and RRC). Will EQT, RRC and the others follow suit? I think at the very least they will wait for if/when the current run fizzles out and the price starts tanking again. If the price keeps rallying will CHK retract and if that happens, will the price immediately start crashing again? As an impartial observer, this one could be fun to watch.

No comments:

Post a Comment