Natural gas may fail to sustain the rally triggered by Chesapeake Energy Corp.’s decision to reduce output by at least 8 percent, according to Subash Chandra, a Jefferies & Co. analyst.
As the CHART OF THE DAY shows, past cuts at Chesapeake haven’t always lifted the commodity’s price for long. Chandra cited the track record of the second-largest U.S. gas producer in a report two days ago.
Gas prices rose from the lowest level in a decade after Chesapeake curtailed gas production by 500 million cubic feet a day on Jan. 23. The cutback may be doubled later “if conditions warrant,” the Oklahoma City-based company said in a statement.
“Curtailments are a response to excess storage volumes, rather than a solution for low gas prices,” Chandra wrote. He estimated that inventories at the beginning of the U.S. winter amounted to 4.42 trillion cubic feet, up 16 percent from three years ago.
Chesapeake also plans to idle half its drilling rigs in gas-only fields by the second quarter and to slash this year’s spending on gas wells by 71 percent, to $900 million. The moves won’t reduce supplies enough to pave the way for sustained price gains, according to Chandra.
“The supply response we want to see is a multiyear decline in volumes” across the industry, the report said. He estimated that production will rise about 3 percent this year.