More Bearish Natural Gas Numbers

In early August, I went out on a limb with a pair of calls on natural gas. First, I argued that due to the ability of operators like Anadarko Petroleum (NYSE: APC  ) and EOG Resources (NYSE: EOG  ) to do more with less, "near-term declines may not be as dramatic as is broadly expected." That, combined with the decision by Chesapeake Energy (NYSE: CHK  ) , XTO Energy (NYSE: XTO  ) , and other producers not to hold back in the face of oversupply, would lead natural gas prices below $3.

The $2 handle on natural gas came just about two weeks later. After briefly retaking the $3 level last week, gas futures are touching new 2009 lows today. That brings us back to my first point regarding softer-than-expected industry-wide production declines.

At the end of each month, the Energy Information Administration reports national gas production on form EIA-914, with a two-month lag. Last week we got the June data, and it does little to dispel the case for lower natural gas prices. Across the lower 48 states, daily production actually showed an uptick of 0.5% compared to May. In my mind, you might as well call that flat production, but it's certainly not the sort of result you'd typically expect after such a vertiginous drop in the rig count.

I should point out that Gulf of Mexico production came in much higher sequentially, at the highest rate in close to a year. BP's (NYSE: BP  ) Thunder Horse field, which is ramping to 200 million cubic feet per day, is just one large project to come online this year.

Looking onshore, though, the only decline of any size was in New Mexico, which saw daily production drop 3% sequentially. Texas -- which accounted for a third of nationwide volumes, partially on account of Devon Energy (NYSE: DVN  ) and many others plugging away in the Barnett Shale -- dropped at a slower rate (-0.7%) than in the prior two months.

Again, I do believe that decline rates will carry the day eventually. The bottom for natural gas still lies ahead, though, so forget about picking up shares of the U.S. Natural Gas Fund (NYSE: UNG  ) . Size up your favorite E&P, and pick your moment of entry carefully.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. Chesapeake Energy is an Inside Value selection. The Motley Fool owns shares of Chesapeake and XTO. The Fool has a disclosure policy.


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  • Report this Comment On September 03, 2009, at 7:57 AM, Matt8265 wrote:

    Well, I think if you knew so much then, and went on record to the degree to use your past prognostications to base this piece, you should go on recommend now and pick the bottom.

    That's the problem with the Jim Cramer's writers of the world they print 10 pieces and come back to/on the single one that was mildly correct.

    TMF misses a hell of a lot more than they hit!

  • Report this Comment On September 03, 2009, at 3:03 PM, TMFJoeInvestor wrote:

    Having previously worked as Toby's editor for a year-plus, I can say that he's proven more than willing to lash himself over bad calls. Unlike yours truly, I'd even go so far as to say that he'd be more likely to point out a bad call of his than a good one. In all honesty, I think Toby's work here at TMF is the best source of free energy commentary that you'll find on the web. We're very lucky to have him.

  • Report this Comment On September 03, 2009, at 3:12 PM, catoismymotor wrote:

    Don't take Matt's words to heart. Like me he is probably worried Disney will put the Jonas Bros. in the next Iron Man movie.

  • Report this Comment On September 05, 2009, at 4:10 PM, FlowerFestival wrote:

    Foolhardy to look to these articles as the final word on whether you should buy or sell something. Rather, think of them as another tea-leaf in the fortune-teller's tea-cup. It helps to fill-in some of the gaps so you can better see what the future has in store for this investment. You should be doing your own research to add more leaves.

  • Report this Comment On November 14, 2010, at 12:45 PM, ajayprathore wrote:

    It is a type of <a href="http://www.catalyst-energy.com">natural energy</a> whose price will lower down future,because Iran has decleared that it will increase the import of oil.

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