Natural gas heading to $1, FirstEnergy says

By Jeff Lewis

January 24, 2012

Don’t be fooled by high-profile production shut-ins announced this week by U.S. gas giant Chesapeake Energy Corp. and its smaller Canadian peers, Encana Corp. and Talisman Energy Inc.

Analysts are growing increasingly bearish about any quick rebound in natural gas prices amid record-high storage levels in the U.S. and mild weather. The view at FirstEnergy Capital in Calgary is that prices are all but trapped at “inescapable” lows.

The commodity “will be sporting a $1 handle in the near future and may have to persist at these depressed levels for some time to generate additional large scale production shut-ins and prevent a test of storage capacity limits prior to the end of the upcoming injection season,” the investment bank’s Martin King said in a note today.

Bank of America-Merrill Lynch predicted much the same last week. It said the market was headed for a repeat of 2009, amid fears that anemic withdrawals and record-high production will outstrip storage capacity. “In our view, Henry Hub prices will have to drop below $2/MMBtu by October in order to curtail production growth and avoid storage containment,” the bank told investors.

Expect Canadian exports to slide further (they have fallen 19 per cent year-on-year since January 2011, FirstEnergy calculates) as U.S. production grows. Even Chesapeake’s willingness to cut daily production by one billion cubic feet won’t be enough to convince the market that gas deserves a lift.

“Much more work needs to be done shutting in production before one can think of prices being more sustained with a US$3 per MMBtu handle,” King writes.