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Why winter demand and natural gas production levels don’t agree

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Natural gas production trends

Since 2008, a considerable amount of U.S. natural gas supply has come online. There hasn’t been an equal increase in demand. This is a result of the “shale revolution.”

marketed natural gas production

The U.S. Energy Information Administration (or EIA) released its Short-Term Energy Outlook (or STEO) on October 7. The STEO projects a 5.4% year-over-year (or YoY) increase in total marketed natural gas production to just over 74 billion cubic feet per day (or bcf/d) in 2014 from ~70.2 bcf/d in 2013.

Total marketed natural gas production is projected to grow another 2% in 2015.

NG production

Strong production trends

According to an 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 that production broke its previous monthly average high records.

Dry natural gas is 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.

According to the Platts report, production in the same regions last year, was lower by 4.8 bcf/d. This implies that production grew by ~7.5% on a yearly basis in September.

Apart from the Marcellus regions, other regions with strong production growth include the Eagle Ford, the Bakken, the Permian, and the greater Anadarko regions.

The EIA will publish September’s production data around the end of November.

Winter crucial for natural gas prices

Natural gas prices can continue to be relatively depressed. Shale gas resource development allowed companies to economically produce natural gas—even at lower prices.

However, the approaching winter could cause a balance because a cold winter raises natural gas demand.

Strong prices are positive for gas-producing companies’ margins like Chesapeake Energy (CHK), Devon Energy (DVN), EOG Resources (EOG), and Cabot Oil and Gas (COG). Most of these companies are part of the Energy Select Sector SPDR ETF (XLE).

If production levels are high enough to meet the heating demand, prices may not be as pressured. It would depend on the severity of the upcoming winter and the natural gas supply levels. Investors will be watching this closely.

In the next part of the series, we’ll discuss natural gas prices’ outlook.

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