Gas Petrospective – October 5, 2010

Natural gas prices dropped another 7.0 cents per million Btu on Monday, as traders returned to the same well-worn themes that we have been hearing repeatedly on declines for two years. Supplies are ample and there is nothing fresh or threatening (enough) on the horizon for traders to buy here. In addition, we now have investors selling gas and buying oil, although we still struggle with their justification.

Regardless of the reasons, investors have been selling in this market lately. We would try to dress it up and slap a fresh coat of paint on it, but it is the same old story and there is little more to say than the standard and platitudinous “supplies are ample,” “industrial demand is lagging,” and “shale-gas production remains heavier than anyone expected.” We do believe that these factors have largely been built into existing prices, but that does not mean that traders or investors are going to stop selling.

In related news, Chesapeake Energy, the second largest US producer of natural gas, sold future production to a Barclays affiliate in exchange for $1.15 billion with which to fund future drilling. It is a lot of gas and a good deal of future drilling. The sale is reportedly equal to 390 bcf of proved gas reserves in addition to daily output of 280 mcf/day in 2011. Chesapeake has done eight similar deals in recent years and it plans to use the cash to develop the Barnet shale formation in North Texas.

Chesapeake is in the vanguard of companies developing gas in the US and is taking steps that are likely to see gas become more of a globally-traded commodity.

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