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Energy Stat of the Week, by Marshall Adkins

Raymond James Energy Stat of the Week
by J. Marshall Adkins

3Q09 U.S. Natural Gas Production Survey: Don`t Go For the Sept 914 Head-Fake
November 16, 2009

Why are natural gas futures pointing to sub-$5/Mcf pricing through next May? Let’s quickly run through the facts. First, natural gas storage levels are now sitting above 3.8 Tcf, and there is a distinct possibility that we could see a net build in inventories this month. Second, on the demand front, we’ve seen only a minimal increase in industrial demand, which we believe is very likely to be offset by gas-to-coal switching in the coming months (a reversal from earlier this year). Third, don’t forget about the LNG cargoes sloshing around the seas this winter. Lastly, and probably the most significant factor weighing on near-term gas prices, natural gas production has yet to show the hard rollover that many of the pundits (read: bulls) were pointing to throughout 2009. In fact, the results from last quarter’s (3Q09) public company U.S. natural gas production survey suggest that domestic gas supply is fading at only a modest pace. Looking ahead, we would tell gas bulls to tread lightly into some potentially bullish production figures - we see a high likelihood that production falls off sharply in September and October - because this natural gas production slip ’n slide has some underlying rocks ahead (i.e., a significant inventory of uncompleted wells, shut-in production) which should push the "real" supply rollover out into 2010. So unless we see the semblance of a frosty winter, it’s hard to get too excited about natural gas prices this winter.

This is a summary of a much more detailed commentary. Please contact your financial advisor for the full report.

There is no assurance any of the trends mentioned will continue in the future. Past performance is not indicative of future results. Investing involves risk and investors may incur a profit or a loss. Specific sector investing can be subject to different and greater risks than more diversified investments. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. Markets for commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

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