The commodity bulls only tell half the story. They say that globalization and rising affluence with increase demand for commodities. This is true, but what they don’t mention is that globalization and rising affluence also increases the supply of commodities. A global community means a global network of investors now deploy capital to develop energy projects. More regions are starting to produce. Investors should fear supply instead of chasing demand.
Producers Pump Faster
Energy companies tried to cut production in response to low natural gas prices, but couldn’t stick to it. United States natural gas production for 2013 will match its 2012 year record levels. Active U.S. gas rigs drastically fell 49% this year and the number of gas rigs stood at 413. This is the lowest number of active rigs since June 1999. US prices this year are estimated only one third of its 2008 price levels.
Unfortunately for energy companies, these efforts have failed. The price of fuel started to fall last October 30 and dropped by 9.2% last November 12 from a record 44% price increase last September 10. “As the gas price goes down, it’s almost like they need to produce twice as much to keep their cash flow where it was,” said Mr. Edward Kallio, director of Calgary based gas consulting firm Ziff Energy Group. Gas stockpiles surged to an all-time high this month to around $15 billion using current spot prices. Oklahoma based Chesapeake Energy (CHK) reported third quarter gas production rose 9.8% from second quarter to 302 billion cubic feet.
Gas companies remain positive that a rise in gas prices would yield from diminishing number of gas rigs. To continue reading, click here.