Gas Market Update (July 5, 2012)

Natural gas prices have been on the rebound over the past three weeks, but fell last week after a US Energy Information Administration (EIA) report showed that gas inventories rose higher than analysts’ forecasts.

“The net injection to U.S. natural gas storage was more than the consensus expectation and suggests a slight weakening in the market’s underlying supply-demand balance,” said Citi Futures Perspective analyst Tim Evans.

According to the report, natural gas inventories increased by 57 billion cubic feet (bcf) for the week ended June 22. Current storage levels are already at 75 percent.

“When you are in a situation of possibly running up against storage capacity, an extra half-bcf a day over a few months can make a big difference,” said Kyle Cooper, managing partner at IAF Advisors. “That’s why you are seeing such huge reactions on very small changes.”

Apache (NYSE:APA), one of three companies planning a $4.5 billion liquefied natural gas terminal (LNG) in Kitimat, recently announced the discovery of what it believes is a new world-class shale gas reservoir in British Columbia’s underexplored Liard Basin. The company estimates that the discovery, unveiled last month, hosts enough natural gas to justify doubling the size of the proposed Kitimat terminal.

Encana (NYSE:ECA,TSX:ECA) stated that during the remainder of the year it plans to invest an additional $600 million in order to take advantage of positive results achieved at a number of its oil– and liquids-rich natural gas plays. In addition, the company has increased its expected total liquids production for the year to 30,000 barrels per day – an increase of 7 percent.

US natural gas futures trimmed early losses to end flat on Monday, with prices hovering near a key technical level, but below last week’s five-month high.

Stephen Schork of the Schork Group noted that bulls have “run into resistance around the 200-day moving average” near $2.83 per million British thermal units.

Most traders and analysts expect that the market will have a hard time breaking the $3 level, where gas loses its appeal over coal for power generation.

Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.