Energy Prospectus

The Energy Information Administration reported a modest and below-estimates storage build of 20 Bcf the week ending August 10, with a 29 Bcf build in the East region offset by modest draws in the West and Producing regions. The new total storage volume was 3.26 Tcf, only 15.7% above the storage at this time last year (compare that to March, when storage was up 57% YOY) and 12.5% above the five-year average (vs. 60% above the five-year in March). The EIA now projects a full-season injection of 1.48 Tcf, the lowest increase in 12 years, on increased power sector demand combined with the production slowdown. However, the agency still believes stocks will reach nearly 4 Tcf by November 1, apparently concurring with a Reuters poll showing that analysts expect 2012 storage to peak at ~3.97 Tcf.
Robert W. Baird said the build represents the first sequential increase in five weeks of “tightness” (or relative market undersupply, as measured by the current week’s injection/withdrawal minus the five-year average, divided by seven days). However, consistent overall tightness in recent weeks has made Baird increasingly confident that we will avoid hitting capacity constraints in the fall.

I continue to believe that NG prices will begin to drift higher in November and we may see $4/mmbtu in January. - Dan

Meanwhile, the EIA pared back its 2012 domestic production growth forecast to 3.8%. The agency also said proved wet gas reserves rose 11.9% YOY in 2010 to 317.6 Tcf, the highest level since the EIA began publishing the data in 1977. States showing the highest wet gas gains were Texas, Louisiana and Pennsylvania.
The Baker Hughes gas rig count showed an 11-rig drop to 484 last week, down 46% YOY and 48% vs. the October 2011 high of 936. In absolute terms, the gas count stands at its lowest level since July 1999. At 25.3%, the percentage of rigs drilling for gas is now at an all-time low (or at least since Baker began tracking the data in 1987).
Regardless, Bank of America recently noted that many gas producers have not cut production by nearly as much as previously intimated, with some even posting Q2 increases. However, Stephen Smith Energy Associates believes current flat production will “gradually transition to a trend decline” in H2 before flattening out again next year.