In the midst of this earnings report week, let’s take another look at the travails of the U.S. natural gas market. The incredibly mild winter across much of the country has driven storage to record highs for this time of year. We entered the winter season with about as much gas in storage as the two previous winters in 09-10 and 10-11. However, we’re now leaving the winter draw down period with storage levels nearly 50% higher than any previous level for this time of year. I even made a handy chart where you can see this for yourself. I even made a handy chart where you can see this for yourself. It is quite clear that the peak storage level has been very similar the last three years, but the draw down this winter was much smaller than normal. This has been a major factor in driving down the spot prices for natural gas in the last six months. (Spot prices are not the same as the residential prices you pay unless your residence is a natural gas power plant.) This also correlates quite nicely (in a certain definition of the word) with the decline in the drilling rig count over the past four months.
When I last looked at this issue two-and-a-half months ago I thought prices were near a bottom then but not about to rebound. I was half-wrong. Spot prices have come down another 25% since then, obviously nowhere near a bottom, though it was more or less correct that they were not rebounding either. The outlook is still a bit grim for natural gas as a direct investment vehicle. I’m still not sure we’ve reached the bottom and there’s still no compelling reason for prices to turnaround. Perhaps an incredibly hot, and thus high-electricity demand summer will create more demand than normal for natural gas to run power plants during the summer months. However, additional capacity is just too readily available at the moment. What could have a clear and strong impact on prices is regulation. If hydraulic fracturing came under serious governmental restrictions, that might curtail some drilling and production activity and ultimately decrease available supply.
Today, Halliburton actually reported rather strong earnings in the face of the challenges in the North American drilling market. That stands in stark contrast to the profit warning that Baker-Hughes issued a few weeks ago. I can’t pretend to be surprised. HAL has always been a very aggressive company, even that one time they made that computer in that spaceship, and they have something of a “home field” advantage in North America. Meanwhile, Baker is seemingly still adjusting to their acquisition of BJS and trying to get everything to click properly. Or, well, it could be several other things that they’ve had difficulty with and it’s not much use speculating what is driving their internal decision making process. Let’s see what my employer and 70% domicile provider says on Friday.