Critical insight: Why natural gas production levels matter

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Long-term natural gas production trends

The U.S. Energy Information Administration’s (or EIA) “Short-Term Energy Outlook” was released on November 12. The report projects a 4.8% year-over-year increase in total marketed natural gas production to around 73.79 billion cubic feet per day (or Bcf/d) in 2014. The report also projects total marketed natural gas production will grow another ~2% in 2015, to 75.46 Bcf/d.

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Short-term production trends

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Record-high production levels have ensured that adequate supplies of natural gas are available. But this robust production has been met by relatively muted consumption. Indeed, the EIA predicts that 2015 consumption will be mostly unchanged from 2014 levels as higher industrial and power consumption is offset by lower residential and commercial demand.

According to Bentek Energy, an energy market analytics specialist, dry natural gas production averaged 68.5 Bcf/day during the 2014 injection season. This is 3.6 Bcf/day higher than last year’s average production, and 8.3 Bcf/day higher than the five-year average. Bentek estimates that for the week ending Wednesday, November 12, natural gas production exceeded a record 71 Bcf/d, before later falling below 70 Bcf/d.

Broadly speaking, dry natural gas—or consumer-grade natural gas—production differs from marketed natural gas production. In dry natural gas production, various liquids that are usually produced along with natural gas, including ethane and propane, are removed.

Shale plays drive production growth

Recent annual increases in natural gas production have been driven by shale plays. Production from shale plays averaged 36.4 Bcf/day from April through September. This is an increase of 15% compared to last year.

The Marcellus Shale is a key contributor to this growth. Production in the Marcellus grew by nearly one-third on average this year, according to the EIA.

Weather versus production

Given robust supply levels and the onset of a chilly winter, it remains to be seen how natural gas prices will be influenced. Both of these crucial indicators will be closely watched by investors.

Strong prices are positive for gas-producing companies’ margins. So companies such as Chesapeake Energy Corporation (CHK), EQT Corporation (EQT), Southwest Energy Company (SWN), and Range Resources Corporation (RRC) stand to benefit should the outlook on prices improve.

And, since most of these companies are part of the Energy Select Sector SPDR ETF (XLE), this ETF will also be affected by the energy price outlook.

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