North American natural gas prices fell over 9% this week, as supply concerns weighed on the commodity. Second quarter earnings announcements from E&P’s indicate that production will accelerate in the back half of this year, which obviously bodes poorly for a commodity that is already oversupplied. Moreover, summer is winding down, and has we head into September the bearish underlying supply-demand balance will become increasingly evident without the support of elevated power loads. We are still anticipating a record injection in the month of September and record overall inventory levels in November as well.
On Thursday the EIA reported a 29bcf injection versus expectations which were generally between 27 and 37. Adjusting for production shut-ins related to Tropical Storm Bonnie, which resulted in 5bcf of lost production, the injection would have been 34. The year-over-year deficit widened to 141bcf and that will widen further with next week’s report, but if we are correct in our projection of record inventories in November, inventories will obviously be at a surplus to the year ago level once again.
Canadian inventories increased 4bcf to 489bcf, a 37bcf deficit to last year. Net imports to the U.S. from Canada have been running above the year ago level due to extremely wide basis differentials in favor of the U.S. Assuming average injections for the rest of the season, Canadian inventories should finish just shy of last year’s record level.
European natural gas prices fell 7.8% to 39.65p/t ($6.29/mmbtu). As U.S. LNG imports have recently been near 0.5bcf/d versus 1bcf/d earlier in the summer, we can assume that those incremental volumes are heading to European markets. EU storage levels remain at record levels and comfortably (3154mcm/111bcf) ahead of year ago levels. Incidentally, the 600-700mmcf/d year-over-year decline in U.S. LNG imports is a notable factor that has served to offset the surge in domestic production. Obviously, import levels will not be falling much from the current 0.5bcf/d levels as most of that is contracted volumes, while domestic production will continue to surge.
Long-term price expectations continue to fall with the 2011 and 2012 strip again hitting new lows. The 12-month strip is back below $5/mmbtu, as E&P’s frantically add to their hedge books. After flattening for much of the injection season, the forward curve steepened this week. We expect a continuation of this trend for the next several weeks as prompt month natural gas prices fall under $4/mmbtu.
The natural gas rig count increased by 11 to again reach the highest level since February 2009. The horizontal rig count surged 25 to reach a new record. The number of horizontal rigs drilling for natural gas specifically, has nearly doubled from a year ago.
