NG Prices React to Chesapeake’s Announcement to Cut Production

Yesterday, MDN told you about Chesapeake Energy’s major announcement that they will reduce capital spending on dry natural gas, or methane-only production, by 70 percent this year (see this MDN story). Chesapeake is also shutting down 9 percent of their domestic production, some 0.5 billion cubic feet of natural gas per day, which represents 1.5 percent of the entire natural gas output in the U.S. The result is predictable—less supply and steady demand equals higher prices. And that’s just what happened:

Natural gas, the worst-performing commodity in 2012, rose for a third day in New York after Chesapeake Energy Corp., the second-largest U.S. producer, said it will cut production and reduce spending.

Futures climbed as much as 2.6 percent after surging 7.8 percent yesterday when Chesapeake said it will “immediately curtail” output of 500 million cubic feet a day and lower planned investment in gas fields by 70 percent from 2011 levels to $900 million. Hedge funds and other large speculators last week cut bets that gas would fall as it traded at its lowest levels since 2002, a government report showed.*

The question is, will this trigger a long-term rally of natural gas prices? Or is it just a short-term blip? Calling George Soros!

*The Washington Post/Bloomberg (Jan 24, 2012) – Natural Gas Rises a Third Day on Chesapeake Plans to Cut Output