Calling a Bottom in Natural Gas Prices? Good Luck With That

Remember how confident Chesapeake Energy CEO Aubrey McClendon was about being a "leader" in shutting in production to rationalize the market? McClendon also sounded pretty confident during Chesapeake's final conference call of 2011 when analysts questioned his decision to take off all of the company's natural gas hedges. He said a bottom was near in pricing, and he pointed to his company's track record in calling when a bottom was near. So much for bottom calling track records.

The drop in the Haynesville rig count has been offset by the increase in Marcellus shale drilling, while the production shut-ins mask the fact that the drillers keep on drilling, led by the biggest of all, Exxon Mobil(XOM) , which would probably still drill for natural gas even if the price is 75 cents. Exxon Mobil's natural gas portfolio in the U.S. isn't hedged, but it is hedged globally by its worldwide exposure to much stronger natural gas pricing in every market but the U.S.

There are some speculative reasons to be a little more optimistic.

The U.S. is coming off the warmest winter on record, which exacerbated the natural gas demand problems.

Further pressure on prices could ratchet up demand as part of a price response dynamic.

Industrial demand, in particular, could pick up in response to lower prices.

Nevertheless, domestic production is still showing no sign of falling off , while storage levels are over 50% higher than at this point last year (and over 60% above the five-year average).

In fact, the formula for why the worst is not over for natural gas is simple and doesn't take a secretive energy market trading cabal to understand: As there is more production and less room to store it, and in an environment of lower demand, the pressure on pricing intensifies.

"Unless we either see a material amount of production come off-line or experience an extremely hot start to summer, the likelihood is that reaching full storage capacity later in the year becomes a distinct possibility," Smith said.

Bedard explained that even though power plant use of natural gas is up, residential and commercial demand is down, and to see year-to-date natural gas supply increase by 5 bcf (8% of the market) amid lower demand can lead to only one conclusion: "This market is very long natural gas and that could continue to pressure prices."