Why natural gas production trends are so important to prices

Natural gas production trends

Record-high production levels have ensured that adequate supply of natural gas is available before the winter starts. The EIA anticipates that inventory levels will be 3,532 bcf by the end of this month.

The U.S. Energy Information Administration’s (or EIA) “Short-Term Energy Outlook” (or STEO) released on October 7 projects a 5.4% year-over-year increase in total marketed natural gas production to around 73.98 billion cubic feet per day (or bcf/d) in 2014. This is the biggest volume and percentage gain since 2011. Analysts project that total marketed natural gas production will grow another 2% in 2015.

Strong production trends

Further, according to analysis by Platts, dry natural gas production in the lower 48 states was 69.1 bcf/d in September. This was the ninth consecutive month when production broke its previous monthly average high.

Dry natural gas is the natural gas that remains after liquids—like propane and butane—have been removed from the marketed natural gas. Dry natural gas is also known as “consumer-grade natural gas.”

The EIA reported that the month-to-date production average now stands at 69.7 bcf/d. This average is 5.2 bcf/d higher than the corresponding average from the same time last year.

Winter’s crucial for natural gas prices

The EIA forecasts that production will increase to 71.4 bcf/d on average over winter.  This would be an increase of 3.3 bcf/d compared to last winter’s average of 68.1 bcf/d.

If the coming winter is anything like the last, prices might climb higher. Strong production trends have been depressing natural gas prices.

Strong prices are positive for gas-producing companies’ margins—companies like Southwestern Energy (SWN), EQT Corp. (EQT), Cabot Oil and Gas (COG), and EOG Resources (EOG). Most of these companies are part of the Energy Select Sector SPDR ETF (XLE).

Investor takeaway

Everything comes down to winter heating demand, or consumption. If production is higher than the actual consumption, prices would remain depressed and the U.S. would have more gas at its disposal.

The differential between production and consumption will be crucial to natural gas prices.

Read the previous part of this series for an analysis of natural gas prices last week. The following part analyzes forecast consumption trends for the approaching winter. Investors should keep a close watch on natural gas production and weather forecasts in the coming months.