Natural Gas Remains in the Tank

While trying to avoid US government reports as much as possible due to their lack of accuracy and “sunny side up” disposition, there are some much better places to look for a reality check. On the consumer side of the equation I like to review the results of Walmart (WMT) and Target (TGT), and on the industral side we can use natural gas. Unlike almost every other commodity on Earth which has been soaring, natural has remains in the tank. Since most commodities are relatively easy to move across the globe (or to be put in storage), their prices have been increasing… along with the now infamous weak dollar play. However, the difficulty in moving natural gas long distances means its a great domestic marker; hence its performance is even more damning considering the weak dollar. To put it in perspective, natural gas was peaking near $14 in first half 2008, and now sits back in the $4s. Much like electricy usage gives us a far better idea of what is happening inside the country of China, natural gas gives us a reality check from the green shoot crowd domestically.

Natural gas prices have dropped by more than 12 percent in the past month as the country continues to sip at its energy reserves and a balmy November allowed homeowners to leave the heat off.

The recession has kept natural gas demand low most of the year. With manufacturers shuttering factories and closing offices, the country is using less electricity and power plants are burning less natural gas.

Analyst Stephen Schork noted that with industrial production still weak, home heating would be the primary source of natural gas demand for the rest of the year. “What does that say about the current recovery, or lack thereof?” Schork said in a research note. (indeed)

We’ve talked in the past about the eventual “filling” of all US natural gas storage that would be coming sooner or later… it seems fast approaching.

The U.S. has added more natural gas into storage every week since March 27, and there is now more natural gas tucked away in the U.S. than at any point in history.

Storage houses are crammed beyond their listed capacity in the West on the Gulf of Mexico, and they’re nearing capacity elsewhere, according to data from the Department of Energy.

That said, American executive compensation schemes (“heads we win, tails we still win”) call for pushing more and more production out into the market, rather than acting rationally in a textbook “supply v demand” dynamic. Why? Because shareholders reward those companies who can show “growth” of natural gas production with higher prices, and that is how a CEO is judged. [Aug 6, 2009: Why are Natural Gas Producers Expanding Production So Aggressively?] Cut back production when natural gas in storage is at its highest levels in US history? Nah, might cut into my bonus – supply and demand and the business cycle is so old school.

For all the talk about how the ‘free market’ works, one must see the misallocation or resources when individual compensation rewards are not based on ratioal behavior but simply goosing figures that investors wish for … in this sector “growth at any cost” is the thing. No different then what you said about banks about 36 months ago – growth at any cost – who cares where it comes from. There is no “bad growth” in America. From August:

Even as they lament a gas glut, the companies have been reluctant to let revenue and profits fall further in the short term by being the first to curtail output.

“I think they might be cutting off their nose to spite their face here,” said Jim Byrne, an analyst at BMO Capital Markets in Calgary who rates Anadarko, Devon and XTO at market perform. “Everybody’s kind of worrying about themselves, and obviously that’s going to happen, but it doesn’t really bode well in our view, certainly for gas prices.”

The companies are pumping more gas than ever in the face of a demand slump and a supply surfeit that caused prices to plunge 72 percent from their 2008 high. U.S. gas supplies are 19 percent above their five-year average.

Investors are rewarding companies for production gains.

There’s a pretty clear correlation between production growth and stock performance,” Hanold said. “These exploration and production companies want to take advantage of that.”

emphasis added

About Mark Hanna 543 Articles

Affiliation: Hanna Capital, LLC

Mark Hanna is President and Owner of Hanna Capital, LLC, a registered investment advisory firm. Mark has been a follower of markets since the late 80s, with a focus on individual equities since the mid 90s. He has been a well known commentator in the financial blogosphere for the past 5 years, following a career in corpoporate finance and accounting. Mark attended the University of Michigan where he graduated with a degree in Economics.

As an avid reader, Market Montage is the personal blogging site for Mark to share his views on economics, markets, and the like. Occasional cynicism and wit shall be deployed in his postings.

Follow Mark on Twitter @fundmyfund.

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1 Comment on Natural Gas Remains in the Tank

  1. I think the Pickens Plan is fine as long as he’s not asking for a bunch of government hand outs. The government should limit it’s funding to basic research in promising energy technology and then let companies take that technology to develop systems that can supply cheap clean energy to the american public.

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