Despite expectations for evidence of declines, February natural gas supply trends evidenced continued growth, says Stephen Richardson, analyst with Morgan Stanley Research. Current Energy Information Administration monthly data confirms the widening imbalance in natural gas fundamentals that were implied by weekly storage changes in this timeframe. For the month of February, sequential demand declined 8% while supply increased 1.2%, month-on-month. "The one bright spot in these monthlies was the stabilization of industrial demand," he says. "This likely confirms the data points concerning petchem and agricultural segment restarts in this timeframe. Going forward, a stabilization of end-market demand and low gas pricing is likely to continue to support the industrial segment, in our view." Further evidence of a supply response is four to six weeks away, he says. While current storage data implies improving balances from recent levels of oversupply, the much anticipated fall in production due to the reduction in the gas directed rig count (down 54% from the 2008-peak of 1,606 gas rigs) is likely a May or June event. While key unknowns remain concerning the demand outlook (e.g. summer weather, continued domestic economic weakness), this inflection point will provide key evidence to the 2010 bulls that gas can indeed find balance, fueling upside to the $5.85 per million Btu NYMEX 2010 strip. "While our concerns have largely been structural, such as supply costs, the duration of oversupply, and LNG, the cyclically bullish data points as evidenced by the self-correcting nature of U.S. gas have garnered more market interest," he says, and notes that he expects volatility to continue.
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