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Western Price Survey

Week's End Edition
January 27, 2012
Producers Break Natural Gas Slide

Producers slowed the natural gas price plunge this week by pledging to ease production and scale back planned drilling.

On Monday, Chesapeake Energy Corp. said it would defer gas-well completions and cut total production about 8 percent, or 0.5 Bcf/day, in response to decade-low natural gas prices. Chesapeake said it is prepared to curtail as much as 1 Bcf/day.

Other producers followed suit. ConocoPhillips said it will limit its domestic natural gas production by roughly 100 MMcf/day; EQT Corp. said it would suspend drilling in the Huron shale after all the wells in progress are completed; Occidental Petroleum said it would cut back drilling, including in the Permian Basin, due to "horrible" market conditions.

Enerfax had expected Chesapeake's announcement to take the pressure off other producers to follow suit. "Analysts said the price response to the news was overdone, but not surprising in a market that is seeing a momentum shift after a volatile 74-cent decline over eight straight days earlier this month."

Michael Zenker and Shiyang Wang from Barclays Capital said that when prices fall, producers connect drilled-but-uncompleted wells more slowly and cut wells waiting on pipelines. Their research showed an insignificant amount of production was cut in September 2009, the last time natural gas prices went so low.

"To us, the 2009 supply response was instructive," the Barclays analysts concluded. "It convinced us that producers are [loathe] to shut in actual production . . . In our view, producers respond to weak prices by cutting planned drilling activity. This means we expect the supply response to come in the form of drilling pullback later in 2012 or into 2013. In the meantime, expect very little change in the trajectory of supply."

Both natural gas spot and futures edged up during the week, but that increase slowed after Thursday trading. In the Jan. 20 to Jan. 27 trading period, SoCal Border gas gained 18 cents to an average of $2.77 and Malin gained 12 cents to $2.60/MMBtu. Permian Basin gas, meanwhile, jumped 34 cents to an average of $2.52.

Working gas in storage reached 3,098 Bcf as of Friday, Jan. 20, according to U.S. Energy Information Administration estimates, a net decrease of 192 Bcf from the previous week. Stocks were 531 Bcf more than last year at this time. Despite this greater-than-anticipated withdrawal, inventories remain at record highs for this time of year.

Western peak-power prices were relatively static over the trading period (see chart). Average nighttime prices made incremental gains with prices of about $20.80 to $23/MWh (see chart).

Peak demand on the Cal-ISO grid reached the week's high of 30,928 MW Monday evening. Northwest Power Pool peak demand reached a high of 58,240 MW, also on Monday.

What's ahead: Los Angeles returns to sunny skies and temperatures in the 70s starting Wednesday, Feb. 1. The Bay Area should be sunny with temperatures nearing the 60-degree mark through Thursday. Varied chances of rain are expected for Seattle and Portland into Thursday. Regional temperatures should be in the 40s, with Portland reaching 51 °F Thursday [Linda Dailey Paulson].

Western Electricity Prices
Week's End: January 23 - 27, 2012
Hub Peak (heavy) Off-peak (light)
Alberta Pool (C$) 16.89-925.51 12.28-28.38
Mid-Columbia 22.40-26 19-26
COB 25.25-27.65 19.25-24
NP 15* 27.80-29.75 20-21.50
SP 15* 27.30-29.50 18.80-22.50
Palo Verde 24.25-27.75 17.50-21.20

* Prices represent both day-ahead locational marginal prices (financial swaps, or EZ Gen DA LMPs) and quasi-swap prices (EZ Gen) as reported by ICE.

Archives of the Western Price Survey for the past year are also available online.

The Western Price Survey is excerpted from Energy NewsData's comprehensive regional news services. See for yourself how NewsData reporters put events in an accurate and meaningful context -- request a sample of either or both California Energy Markets and Clearing Up.

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Contact Chris Raphael, editor with questions regarding Price Survey Content.

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