Tuesday, March 27, 2012

Today's Major Market Move: Natural Gas Futures Drop 4.4% In Past Two Days

Natural Gas Futures hit a ten year low on Tuesday after dropping 4.4% in the past 2 trading sessions. The 2.25(ish) level had held twice before, once in back in January when Chesapeake infamously announced they were cutting production, and it held again two weeks ago on March 15th. This third attempt was the proverbial straw that broke the camel's back as front month natgas futures finished the day at 2.18.

Click here to go to the live chart.
With the historically warm winter and all of the new wells, storage facilities are now running out of space. This means that producers will then have two choices, sell the gas immediately at distressed prices or cut production. Here's more details from Reuters:
If capacity is reached, the prospect of producers selling their gas below market prices -- or even giving it away -- is sending shivers through a market whose prices have already fallen to 10-year lows.

U.S. futures fell to $2.17 per million British thermal units on Wednesday due to huge oversupply. Last summer they traded above $4. Low prices are great news for consumers but a bane for producers whose profits have been slashed by slumping prices.

Injection restrictions are not common for this time of year.

"It is unusual to see capacity restrictions this early," an analyst at a major storage owner said. "We usually see those notices deeper into the summer."

When storage is filled, pipelines are the next link in the chain, and when they are full, producers will likely be forced to cut supply, a move they are reluctant to make. Even at low prices, producing wells make a slight profit.
Let's take an updated look at our chart comparing stock prices of the natgas producers with the commodity price:

Click here to go to the live chart.
The companies are actually outperforming the commodity by a fairly wide margin. While natgas prices are down over 40% in the past 15 months, Range Resources Corporation (ticker: RRC) and EQT (ticker: EQT) are still in the black. Chesapeake (ticker: CHK) has been hit the hardest but has only dropped half as much as the commodity.

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