Gas Producers Consider Cutting Production


Natural gas producers are teetering on the fourth consecutive winter of low demand and prices, but relief could be at hand, analysts said Monday.

According to the U.S. government's Energy Information Administration, natural gas in storage is about 5% lower than this time last year but still more than 6% above the 5-year average.

FirstEnergy commodities analyst Martin King said the falling futures curve means producers won't be able to lock in higher prices that would protect cash flows, in turn allowing them to drill through another weak winter.

King said he expects the market will eventually turn but isn't sure when.
"I think ultimately what the market is looking for here is some sort of consistent, sustained breakdown in the U.S. gas drilling rig count and then at some point it will hit supply," he said in an interview.
Falling futures heading into the peak demand season is a sign that speculators have given up on a winter rally, said Duncan Robertson, a partner with Calgary-based consultants SBM Inc.

Capitulation of capital markets—along with futures prices—is a necessary requirement for producers to stop drilling and allow excess inventories to come down, he said.

In that sense, the upcoming winter season could be the "dark before the dawn" that ushers in the next up cycle.
  1. Despite what it sees as another bleak winter for gas markets, SBM is describing itself as "bullish" on gas at a presentation in Calgary today.
  2. "You have to see that capitulation and now we're starting to see the early signs that the sentiment is changing," Robertson said.
  3. "When everybody turns bearish, that's when we tend to get bullish. We're early in the process, but it's still a long way to go."

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