Natural Gas Futures Surge on Chesapeake Plans to Cut Production
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Jan. 23 (Bloomberg) -- Natural gas, the worst-performing commodity this year, rebounded from a 10-year low in New York after Chesapeake Energy Corp., the second-largest U.S. producer, said it will cut production and reduce spending.
Futures climbed almost 10 percent, the biggest gain in more than two years, after Chesapeake said it will “immediately curtail” output of 500 million cubic feet a day and lower planned investment in gas fields by 70 percent from 2011 levels to $900 million. Hedge funds and other large speculators last week cut bets that gas would fall as it traded at its lowest levels since 2002, a Commodity Futures Trading Commission report showed Jan. 20.
“We have found a price level where companies are finally going to stop producing,” said Phil Flynn, vice president of research at PFGBest in Chicago. “With Chesapeake cutting back, traders are wondering who's going to be next.”
Natural gas for February delivery rose 13.5 cents, or 5.8 percent, to $2.478 per million British thermal units at 12:31 p.m. on the New York Mercantile Exchange. The futures have declined 17 percent this year. A gain of 10 percent would be the biggest one-day increase since Sept. 16, 2009.
April $2 “puts,” or wagers that prices will drop, were the most active options in electronic trading on the Nymex. They fell 1.2 cents to 4.2 cents per million Btu on volume of 528 at 12:25 p.m. local time.
Gross production at Chesapeake wells will be cut by as much as 1 billion cubic feet a day, or about 1.5 percent of U.S. marketed gas output in 2011, as gas-well completions are deferred wherever possible, the Oklahoma City-based company said in a statement today.
Chesapeake Cuts
The company will idle half of its drilling rigs in fields that produce only gas by the second quarter. The fields include the Barnett Shale of Texas, the Marcellus Shale and the Haynesville Shale.
Gas production grew by a record 4.5 billion cubic feet a day in 2011, the Energy Department said in a Jan. 10 report., while demand growth lagged behind at 920 million.
The U.S. Energy Department cut its estimate for natural gas reserves in the Marcellus shale formation by 66 percent, citing improved data on drilling and production.
About 141 trillion cubic feet of gas can be recovered from the Marcellus shale using current technology, down from the previous estimate of 410 trillion, the department said today in its Annual Energy Outlook. About 482 trillion cubic feet can be produced from shale basins across the U.S., down 42 percent from 827 trillion in last year's outlook.
GSCI Index
Gas is the biggest decliner this year on the Standard & Poor's GSCI Spot Index of raw materials partly because of increased supply from hydraulic fracturing, or fracking, a process of extracting natural gas and oil from shale rock by injecting water and chemicals.
U.S. inventories totaled 3.29 trillion cubic feet in the week ended Jan. 13, according to the Energy Department. Supplies were 21 percent above the five-year average for the week, compared with 17 percent the prior week, making it the widest surplus since June 2009.
Chesapeake's cut in dry gas drilling may be redirected to areas rich in oil and gas liquids, which still yield associated natural gas, said Pax Saunders, an analyst at Gelber & Associates in Houston, in a note to clients today.
The “surplus is getting huge, and despite this week's expected interruption in gains, it will continue to build,” Saunders said.
Net Short
Hedge funds and other large speculators last week pared their net-short positions to the smallest since July, the CFTC report on outstanding positions in futures and options showed after markets closed on Jan. 20.
“The funds are still holding large net short positions, but they are starting to buy them back,” Peter Beutel, president of Cameron Hanover Inc. in New Canaan, Connecticut, said in a note to clients. “Once prices do find a bottom, this change in open interest will combine with oversold pressures to give us a gargantuan rally. We just don't know from where.”
The speculators held net-short positions in Nymex gas futures and options to 86,604 lots as of Jan. 17, compared with 103,711 a week earlier, the CFTC's Commitments of Traders report showed.
Bets turned to net-long for four types of U.S. gas, switching to 15,938 from net shorts of 10,344 the previous week.
Futures and Options
That measure of gas positions comprises Nymex Henry Hub natural gas futures, Nymex Henry Hub Swaps, Nymex Henry Hub Penultimate Swaps and ICE Henry Hub Swaps. Henry Hub, in Erath, Louisiana, is the delivery point for Nymex futures, a benchmark price for the fuel.
The weather may be mostly seasonal or warmer than average across the continental U.S. through Feb. 6, according to MDA EarthSat Weather in Gaithersburg, Maryland. About 51 percent of U.S. households use natural gas for heating, according to the Energy Department.
The low temperature in New York on Jan. 31 may be 35 degrees Fahrenheit (2 Celsius), 8 above normal, according to AccuWeather Inc. in State College, Pennsylvania. The low in Chicago may be 22 degrees, 3 above normal.
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