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Natural gas production declined in January and December, positive for prices

2013.04.08 - Nat Gas ProductionEnlarge Graph

  • U.S. natural gas production declined slightly from 65.8 billion cubic feet per day in December to 65.2 billion in January. This is the second consecutive monthly decline in production, which is a positive for natural gas prices.
  • From a longer-term perspective, U.S. natural gas production has increased dramatically over the past several years as advancements in technology have made previously uneconomical areas more profitable to drill.

U.S. natural gas production is the main driver of supply and a large determinant of natural gas prices. For the month of January, production fell 0.9% month over month to 65.2 billion. This followed December’s production decrease of 0.8%. This trend is positive for natural gas prices. However, it is difficult to determine if these two months of data represent a real long-term sustained trend of decreasing natural gas production.

To provide some context, in recent years natural gas prices have declined sharply, mostly as a result of the “shale revolution.” This term describes both technological advances (such as hydraulic fracturing and horizontal drilling) that have made previously uneconomic hydrocarbon resources viable to drill, much of which was contained in shale rock. The shale revolution caused many oil and gas companies to rapidly lease and drill land containing natural gas rich shales, and domestic production of natural gas has surged over the past seven years. In late 2005, production was roughly 45 billion cubic feet per day, compared to present rates of roughly 65 billion cubic feet per day.

2013.04.11 - Nat Gas Production LTEnlarge Graph

The increase in production resulted in a surge of natural gas supply on the market without enough increase in demand to support prices. In late 2005, the commodity traded above $15.00/MMBtu (millions of British thermal units) at points, but prices fell to as low as ~$2.00/MMBtu in early 2012, mostly due to the huge increase in domestic production. Currently, the commodity trades at ~$4.00/MMBtu.

2013.04.11 - Nat Gas Prices LTEnlarge Graph

Given the sustained low price environment, producers stopped targeting dry natural gas fields, and, as a result, natural gas rig counts fell off dramatically. However, natural gas production had not fallen by much. For more on this, please see “Natural gas rig counts down 15% over three weeks despite strong rally in prices.” The natural gas production decline in January and December may finally be the result of producers shifting capital away from natural gas after a long period of volatile production.

A decrease in supply, like what occurred in December and January, is a positive medium-term signal for natural gas prices. However, investors should note that by the time this data is reported it is two months stale, and what is more important is if the trend is expected to continue. Companies most affected by changing natural gas prices are independent upstream companies with asset portfolios more heavily weighted towards natural gas, such as Chesapeake Energy (CHK), EXCO Resources (XCO), Comstock Resources (CRK), and Southwestern Energy (SWN). Additionally, investors in natural gas ETFs, such as the United States Natural Gas Fund (UNG), should monitor U.S. natural gas supply trends as they are an important determinant in price.

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    United States Natural Gas Fund (UNG) has a crystal ball