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Why natural gas production has been limiting prices

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Sep. 22 2014, Updated 4:00 p.m. ET

Natural gas production trends

Since 2008, a considerable amount of U.S. natural gas supply has come online without an equivalent increase in demand. This is a result of the “shale revolution.”

marketed natural gas production

The shale revolution usually refers to the widespread application of new technologies—like hydraulic fracturing and horizontal drilling. The new technologies develop geologic formations that were previously uneconomic to drill.

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The U.S. Energy Information Administration (or EIA) released its Short-Term Energy Outlook (or STEO) on September 9. It projects a 5.3% year-over-year (or YoY) increase in total marketed natural gas production to ~74 billion cubic feet per day (or bcf/d) in 2014. Total marketed natural gas production in 2013 was ~70.2 bcf/d.

Total marketed natural gas production is projected to grow another 2% to just under ~75.5 bcf per day in 2015.

The STEO reports that significant increases are already being seen in the Lower 48 states.

Major producing regions

According to EIA data, increased natural gas production is driven by higher production in the Marcellus and Utica shales.

The Marcellus Shale is located in the northeast. The EIA stated that the Marcellus field’s output will average 15.9 bcf/d in September—up 31% from a year ago. Click here to learn more about the Marcellus Shale.

The Utica Shale has also become one of the fastest-growing gas-producing regions in the U.S. Production increased from just ~155 million cubic feet per day (or MMcf/d) in January 2012 to an estimated ~1.3 bcf/d in September 2014. This is a growth of approximately eight times in less than three years. Click here to learn more about the Utica Shale.

Excess production can put pressure on prices

Natural gas prices can continue to remain relatively depressed. The shale resources’ development allowed companies to economically produce natural gas—even at lower prices.

This can be seen in the Marcellus region. Natural gas is trading at a discount to NYMEX benchmark prices.

Weak prices hurt gas-producing companies’ margins like Range Resources (RRC), Cabot Oil and Gas (COG), Devon Energy (DVN), and Southwest Energy (SWN). All of these companies are components of the Energy Select Sector SPDR ETF (XLE).

In the next part of the series, we’ll discuss the factors that could support natural gas prices in the months to come.

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