Natural Gas Soars on Chesapeake Production Cut
Natural Gas has been a very volatile commodity over the last number of years. The commodity that helps heat our homes has seen lows of under $2.00 and highs of over $15.00.
However, within the last few years, natural gas has not traded above $10.00. The commodity has been in a downtrend ever since 2008.
After the commodity traded at the lowest level since 2002 at $2.231 early this morning, we have seen relief higher after Chesapeake Energy (NYSE: CHK] announced it would decrease its natural gas production.
Chesapeake announced a plan to further reduce its operated dry gas drilling activity by 50% to approximately 24 rigs by the 2012 second quarter from 47 dry gas rigs currently in use and by 67% from an average of approximately 75 dry gas rigs used during 2011. Chesapeake's operated dry gas drilling capital expenditures in 2012, net of drilling carries, are expected to decrease to $0.9 billion, a decrease of approximately 70% from similar expenditures of $3.1 billion in 2011.
The company announced it would immediately curtail approximately 0.5 billion cubic feet [bcf] per day, or 8%, of its current operated gross gas production of 6.3 bcf per day, which is about 9% of the nation's natural gas production.
When Chesapeake's statement was released, natural gas futures spiked higher on heavy volume, moving over 10% higher from about $2.27 to about $2.57 in about an hour.
Natural gas spiked higher because a 9% cut of the United States' natural gas production means less of a supply to come in the future. The reason for the downtrend in the last few years is because supply outstrip demand, with more recent decline being because of an abnormally warm winter season. The velocity of today's spike is because traders believe this may become an industry trend.
When companies drill, they have a set fixed cost associated with production, so as the companies' margins continue to fall (as natural gas falls), these E&P companies will likely follow Chesapeake's lead and cut production, as they will not cover costs of production since margins are so low. So it is not worth it to them.
Currently, natural gas futures are trading up over 7% on the session, at $2.51, or down about 15% on the year.
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