Natural gas production trends
Since 2008, the natural gas supply has increased considerably, but without an equivalent increase in demand, thanks to the “shale revolution.”
The “shale revolution” generally refers to the widespread application of new technologies, like hydraulic fracturing and horizontal drilling, to develop areas that were previously not profitable.
The Annual Energy Outlook 2014 from the Energy Information Administration (the EIA) projected that U.S. natural gas production will increase an estimated 56% from 2012 to 2040. Most of the production is expected to come from shale gas plays, which the EIA projects will grow to 19.8 trillion cubic feet by 2040.
Major producing regions
According to EIA data, higher production in the Marcellus Shale as well as the Utica Shale drives this increasing natural gas production. The EIA projects that the output from the Marcellus field in the northeast will average 15.9 billion cubic feet a day in September, up 31% from a year ago.
The Utica Shale has also become one of the fastest-growing gas-producing regions in the U.S. Production has increased from ~155 million cubic feet (or MMcf) per day in January 2012 to an estimated ~1.3 Bcf per day. This represents an ~800% increase in less than three years.
Excess production can pressure prices
Natural gas prices could remain relatively depressed, as the development of shale resources has allowed companies to produce natural gas economically at lower prices.
Prices have already been under pressure due to mild summer weather (see Part 3 of this series). A supply glut could further depress prices.
Weak prices hurt the margins of gas-producing companies like EQT Corp. (EQT), Range Resources (RRC), EOG Resources (EOG), and Chesapeake Energy (CHK). All these companies are components of the Energy Select Sector SPDR ETF (XLE).
Continue to the next part of this series to see what factors might support natural gas prices in the months to come.