The U.S. Energy Information Administration’s, or EIA, January “Short-Term Energy Outlook” projects that total dry natural gas production will grow by ~3.8% to 72.80 Bcf (billion cubic feet) in 2015 and by ~2.2% to 74.38 Bcf in 2016. According to EIA estimates, dry natural gas production was 70.17 Bcf in 2014.
Dry natural gas is the natural gas that remains after liquids such as propane and butane have been removed from the marketed natural gas. Dry natural gas is also known as “consumer-grade natural gas.”
High production levels are bearish for natural gas prices. Weak prices hurt the margins of gas-producing companies including Chesapeake Energy (CHK), Range Resources (RRC), Devon Energy (DVN), and QEP Resources (QEP). Since those companies that are part of the Energy Select Sector SPDR ETF (XLE) make up ~4.6% of its holdings, the energy price outlook is likely to affect XLE as well.
December 2014 is the most recent month for which EIA data are available. According to these data, dry gas production was ~74.3 Bcf per day, or ~12% higher than it was in December 2013.
According to the EIA, dry natural gas production will average 72.7 Bcf per day, February through March. This is 5 Bcf per day higher than the same period in 2014 and is likely to help moderate prices to an extent.
The EIA continues to be bullish about natural gas production in 2015. For more on this, read Why the EIA is bullish about natural gas production.
Impact on pricing
Strengthening inventory, coupled with continued production growth, sets a grim scenario for natural gas prices. The EIA forecasts that monthly average prices will remain below $4 per MMBtu throughout most of 2015 and 2016.
Natural gas inventories are governed by natural gas production and consumption trends. In this part, we analyzed how high production levels have depressed natural gas prices. The next part of our series looks at whether strong consumption trends could help push prices upward.