Gas Petrospective – August 31, 2010

Natural gas prices rallied more than a dime yesterday as increasing tropical activity combined with forecasts for hotter temperatures across much of the country. After a period of very temperate readings, temperatures in the Great Lakes and in the Northeast and Mid-Atlantic states are forecast to heat up appreciably tomorrow and Thursday.

Dow Jones also referenced a report released by the Energy Information Administration (EIA) that June natural gas output showed the “first month-over-month decline since December, 2009.” The data showed a 1.2% drop in output to 64.3 bcf/day.

One of the enduring bearish factors in the natural gas market has been the steady increase in shale-gas production this year. The amount produced and the number of rigs employed in drilling have increased steadily through 2010. With this as a background factor, Dow Jones has suggested a more prominent role for the consistent chipping away of the surplus against the five-year average of natural gas in storage. In the last five weeks, the surplus against the five-year average has fallen from 261 bcf (9.92%) to 177 bcf (6.16%). The year-on-year deficit has grown from 33 bcf (1.77%) to 198 bcf (6.09%).

These numbers were successfully ignored last week, but with a conveyor belt of storms now in full stride and with temperatures ready to get very hot across a number of regions, the June decline in output has taken on a more ominous tone. Traders have also managed to keep economic developments at arms’ length for most of 2010, but we may be entering a period when that will change.

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