Will Rising Dry Natural Gas Production Pressure Prices in 2015?



Production trends

The US Energy Information Administration’s (or EIA) January “Short-Term Energy Outlook” (or STEO) 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. As per EIA estimates, dry natural gas production was 70.17 Bcf in 2014.

High production levels are bearish for natural gas prices. Weak prices hurt the margins of gas-producing companies like Ultra Petroleum (UPL), Range Resources (RRC), and QEP Resources (QEP). All these companies are part of the Vanguard Energy ETF (VDE), making up ~1% of the ETF. RRC and QEP are also components of the Energy Select Sector SPDR ETF (XLE), and make up ~1% of the ETF.

Per the EIA, dry gas production in December 2014 was ~74.3 Bcf/d (billion cubic feet per day), which is ~12% higher than it was in December 2013.

According to the EIA, dry natural gas production will average 72.7 Bcf/d February through March. This is 5 Bcf/d higher than the same period in 2014. This will help moderate prices to an extent.

Last week, dry gas production declined 0.4% over the week prior, but it was still 8.3 % higher than levels reported in the corresponding week last year.

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 continues to be bullish about natural gas production in 2015. Read Must-know: Why the EIA is bullish about natural gas production to find out more.

A strengthening inventory coupled with continued production growth has set a grim scenario for natural gas prices. The EIA forecasts that monthly average prices will remain below $4 per MMBtu through most of 2015 and 2016.

Natural gas inventories are governed by natural gas production and consumption trends. In this article, we analyzed how high production levels have depressed natural gas prices. The next article in this series analyzes whether strong consumption trends could help push prices upwards.

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