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Is It Time For Natural Gas Prices To Rebound?

January 23, 2012 – Comments (0) | RELATED TICKERS: CHK , APA , ECA

Natural gas prices hit their lowest price levels since 2002 during the current decline. The obvious rationale for lower natural gas prices is an oversupply in the U.S. As supply exceeds demand for natural gas, prices are pushed lower as the market swings in favor of gas buyers. There will be a time when production will get reduced to the demand level that will improve the market prices for natural gas. The uncertainty is the timing of the supply-demand correction.

Chesapeake Energy Corp. (CHK), one of the oil and gas producers at the origin of the current natural gas supply glut, said it will reduce drilling activity this year amid falling natural gas prices. After drilling more U.S. gas wells in recent years than any other company, Chesapeake, based in Oklahoma City, announced it was cutting spending as natural gas prices had unexpectedly reached its lowest levels in a decade. "An exceptionally mild winter to date has pressured U.S. natural gas prices to levels below our prior expectations and below levels that are economically attractive for developing dry gas plays in the U.S., shale or otherwise," said CHK Chief Executive Aubrey K. McClendon.

This message will likely resonate with other natural gas produces who may decide to cut production. Eventually, if gas production is reduced across the producer companies, the price of natural gas will spike up creating a rebound in natural gas stocks. The chart below shows how natural gas rebounded in late 2009 from its lows. If history repeats itself, natural gas is ready to rebound.

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