CALGARY - Natural gas producers are teetering on the fourth consecutive winter of low demand and prices, but relief could be at hand, analysts say.
Even though North American storage inventories are marginally lower than they were at this time last year, ConocoPhillips CEO Jim Mulva told an oil and gas conference in Houston that his company is shutting onshore natural gas production in Canada and the United States while it awaits higher prices.
"We've had a small amount of production that we've shut in because we feel it's not that economic to produce," Mulva told reporters at a conference. "And so we'd rather keep it in the ground for when we can produce it at a later date. "
Conoco didn't disclose how much gas it shut in, but the move was seen as the latest sign producers in the U.S. might finally be getting ready to cut production and drilling in the face of low prices, following the cue of Canadian producers that have dramatically slashed drilling since the third quarter of 2006.
According to the U.S. government's Energy Information Administration, natural gas in storage is about five per cent lower than this time last year but still more than six per cent above the five-year average.
Speaking in Calgary last week, Texas oilman T. Boone Pickens said natural gas producers should quit drilling new gas wells as long as prices remain below $4 US.
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 and in turn allow them to keep drilling through another weak winter.
But the U.S. gas-directed rig count stood at 967 units last week, about 25 per cent higher than this time last year.
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.
"When that will happen could be very late this year or early next year, so it's probably a bit of a ways off yet."
Other observers said gas markets could be heading into the final bottom phase that could set the stage for the next recovery, possibly as early as spring.
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.
SBM doesn't predict prices but gauges leading indicators to determine when market cycles are changing.
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.
Despite what it sees as another bleak winter for gas markets, SBM is describing itself as "bullish" on gas.
"You have to see that capitalation and now we're starting to see the early signs that the sentiment is changing," Robertson said.
"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."
