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Natural Gas Market Falling Victim To The Bear

By Adam Currie — Exclusive to Gas Investing News
Natural Gas Market Falling Victim to the Bear

The natural gas market has hit a lull having fallen below $2 per million British therma l units  ( MMBtu) to record a new 14-year low.

Market commentators believe that the current market situation is a reaction to diminished demand for fuel due to a warm winter, and a supply glut created by large-scale discoveries.

As the commodity's price continues to plunge, many are claiming that it is difficult to find even a single area where it is profitable to drill for natural gas alone within the North American region, with most companies now opting to drill for oil and ethane, producing gas as a by-product. The dire scenario has meant that exploration and drill counts have reacted accordingly.

In a recent analysis report, Houston-based oilfield services company Baker Hughes Inc. (NYSE: BHI) reported a dip in US rig count numbers. The company stated that the drop can be attributed to a decrease in the tally of both oil- and natural gas-directed rigs, which as of the end of March recorded a new ten-year low.

The report noted that the natural gas rig count decreased to 652 on the week ended March 23. Even more alarmingly from an exploration and production perspective, the number of gas-directed rigs is at its lowest level since May 2002, and is 59 percent below the all-time high it reached in late summer 2008.

Zacks Investment Research has added to this bleak outlook by stating that with horizontal rig count - the technology responsible for abundant gas drilling in domestic shale basins - close to a record high, the “grossly oversupplied” market will continue to pressure commodity prices in the backdrop of sustained strong production.

It seems that players within the natural gas sector are also adopting a bearish outlook, with several exploration and production outfits, including Ultra Petroleum Corp. (NYSE: UPL), Talisman Energy Inc. (TSE: TLM), and Encana Corp. (NYSE: ECA), reducing their 2012 capital budget to minimize investments in natural gas development drilling.

Chesapeake Energy optimistic

Despite this negativity, a number of producers have taken a more bullish outlook, with Chesapeake Energy Corp. (NYSE: CHK) opting to shut in production to cope with the current weak environment for natural gas. The second-largest US natural gas producer has argued that there are good reasons to be bullish in the medium and long term due to shrinking supply and growing demand from the power, transportation, industrial, and export sectors.

In a recent presentation, the company argued that the NYMEX forward price curve for natural gas is failing to recognize future supply and demand fundamentals, and is likely "one of the most mispriced investments in the market."

It forecasts that power companies will increase natural gas demand by ten to 15 billion cubic feet a day over the next decade, that surging gasoline prices will force policy changes to stimulate the market for compressed natural gas (CNG) and liquefied natural gas (LNG)-powered vehicles, and that the US and Canada will be exporting LNG by the end of 2015.

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