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Production Shut-Ins Fuel Nat Gas Spike

Wednesday, 25 Jan 2012 | 12:59 PM ET

Natural gas futures surged 8 percent after Conoco Phillips said Wednesday its shutting down 100 million cubic feet per day (0.1 bcf) of production in 2012 due to lower prices.

A hydraulic fracturing site
Getty Images
A hydraulic fracturing site

It's a smaller shut-in than the half-a-billion cubic feet per day of natural gas Chesapeake Energy announced Monday that it is putting into place.

Occidental Petroleum also said Wednesday that it is cutting back on pure gas drilling in the mid-continent and South Texas due to "horrible" natural gas prices.

These events have been catalysts for a short-covering rally that's caused natural gas prices to spike more than 50 cents in three days.

"Producers are taking measures to limit production levels that have driven natural gas prices to near decade lows this month," says Eugene McGillian, analyst and broker at Tradition Energy. "The fact that additional producers are coming out with these announcements is fueling the rise."

February NYMEX natural gas futures, which expire on Friday, rose to an intraday high of $2.776 per million BTUs Wednesday morning up from a $2.24 early Monday morning. Barclays Capital says a closing price for front-month natural gas futures above $2.62 on Wednesday would signal further upside toward $2.93 before showing signs of a top.

Adding to the more optimistic stance of some traders is the fact that President Obama backed shale gas drilling in his State of the Union address Tuesday night and the weekly EIA storage data to be released on Thursday morning is expected to show a more seasonable withdrawal from storage due to normal temperatures.

Platts' survey of analysts calls an average withdrawal from storage of 171 to 175 billion cubic feet. "A draw within those expectations would compare with a 184-Bcf withdrawal during the corresponding week of last year and the five-year-average of 173 Bcf," according to Platts.

Still, some analysts are skeptical about this nat gas snap back. "We hardly think it is time to call a bottom, although events may prove otherwise," says Again Capital founder John Kilduff. "Markets overshoot, to be sure, but an industry wide trend ... would be necessary to propel a full-blown reversal."

Kilduff also says a shift in weather patterns and a rise in consumption would also be required to keep this rally going.

Disclaimer

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