Natural gas prices stayed remarkably strong this week, despite two very bearish developments. This is actually bullish, when a market won’t go down on bad news. Yet I still think this downturn in natural gas prices could be longer than people think. I am not buying natural gas stocks right now.
The bearish points this week were:
1) An injection into storage this week of 114 bcf, the fourth week in a row of 100 bcf + injections. (I don’t think this has ever happened before.) Expectations were for 105 bcf, and almost double last year’s injection for the same week.
2) The rig counts in North America turned slightly higher this week, for the first time in 2009. In the regular Friday report from Baker Hughes, US gas rigs were up 6 over last week, and horizontal rigs were up 20 - which deliver a lot more gas than verticals. Canadian rigs had a much bigger percentage jump, up 35 to 143. About 66% of all rigs in Canada drill for gas (though this number is surely going lower). Of course, these numbers all half of what they were a year ago.
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I think there are a couple points that could prolong this natural gas price downturn longer than people think:
1. Banks did not dramatically cut back on credit lines for the producers this year, despite a big drop in gas prices. So even though a natural gas producer was operating close to its debt limit, it wasn’t forced to make the tough choices to survive. This painful process of keeping alive a dying patient will now be drawn out longer than normal.
2. New junior companies cannot get financed. So when two or more companies merge, one management team is out of a job. And in this market, they won’t get a new one. So management has no incentive to sell or merge.
3. The banks are saying - I have two sick patients, each having 80% of their debt drawn, and they want to create one larger sick patient with 80% of its debt drawn….no thanks.
4. Most junior and perhaps even some intermediate companies are receiving very little cash flow right now and still have some fixed costs - like regular interests payments on their debt…even a little cash flow is better than none. So I think they will be hesitant to turn off the tap, no matter how the small the drip.
5. And again, LNG is a wild card. If Asian demand doesn’t pick up soon, the global fleet could be coming to North America and keeping prices here suppressed.
- Brewskie
Yes, it is the marginal cost of production that counts. This is why we so often get gluts in commodities. Maybe you sunk $1 billion into a project. Doesn't matter. What matters is if the price of the commdity is above your operating production costs. B Cole
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