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Natural Gas Storage Surplus Widens

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The U.S. Energy Department's weekly inventory release showed a lower-than-expected drop in natural gas supplies, as warmer-than-normal temperatures across the country have restricted the commodity’s requirement for power burn. In fact, gas stocks – currently 33% above benchmark levels – are at their highest point for this time of the year, reflecting low demand amid robust onshore output.

The Weekly Natural Gas Storage Report – brought out by the Energy Information Administration (:EIA) every Thursday since 2002 – includes updates on natural gas market prices, the latest storage level estimates, recent weather data and other market activities or events.

The report provides an overview of the level of reserves and their movements, thereby helping investors understand the demand/supply dynamics of natural gas.

It is an indicator of current gas prices and volatility that affect businesses of natural gas-weighted companies and related support plays like Anadarko Petroleum Corporation (NYSE:APC - News), Chesapeake Energy (NYSE:CHK - News), EnCana Corporation (NYSE:ECA - News), Devon Energy Corporation (NYSE:DVN - News), Nabors Industries (NYSE:NBR - News), Patterson-UTI Energy (NasdaqGS:PTEN - News), Helmerich & Payne (NYSE:HP - News) and Halliburton Company (NYSE:HAL - News).

Stockpiles held in underground storage in the lower 48 states fell by 78 billion cubic feet (Bcf) for the week ended February 3, 2012, below the guidance range (of 84–88 Bcf draw) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Companies Inc (NYSE:MHP - News).

The decrease – the eleventh consecutive withdrawal of the 2011-2012 winter heating season after stocks hit an all-time high in mid-November – is well below last year’s draw of 206 Bcf and the 5-year (2007–2011) average drawdown of 191 Bcf for the reported week.

The current storage level – at 2.888 trillion cubic feet (Tcf) – is up 714 Bcf (32.8%) from both last year and the five-year average. With this sharply widening natural gas surplus, inventories in underground storage are likely to end the winter close to their highest level of 2.1 Tcf set in 1983. 

A supply glut has pressured natural gas prices during the past year or so, as production from dense rock formations (shale) – through novel techniques of horizontal drilling and hydraulic fracturing – remain robust, thereby overwhelming demand. As a matter of fact, natural gas prices have dropped more than 50% from 2011 peak of about $5.00 per million Btu (MMBtu) in June to the current level of around $2.40 (referring to spot prices at the Henry Hub, the benchmark supply point in Louisiana).

To make matters worse, mild winter weather across most of the country has curbed natural gas demand for heating, indicating a grossly oversupplied market that continues to pressure commodity prices in the backdrop of sustained strong production.

This has forced players like Chesapeake Energy to announce volume curtailments. The Oklahoma-based firm – the second-largest U.S. producer of natural gas behind Exxon Mobil Corporation (XOM) – declared last week that it had already slashed more than 500 million cubic feet per day of output and may eventually raise volume cutbacks to as much as 1 billion cubic feet per day if prices stay low.

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