The US Energy Information Administration’s (or EIA) February “Short-Term Energy Outlook” (or STEO) projects that total marketed natural gas production will grow 5% to 78.39 Bcf in 2015 and by a further 2% to 79.96 Bcf in 2016. The EIA estimates that total marketed natural gas production was 74.68 Bcf in 2014.
High production levels are bearish for natural gas prices. Weak prices hurt the margins of gas-producing companies like Encana (ECA), EQT (EQT), Southwest Energy (SWN), and QEP Resources (QEP). Barring ECA, all these companies are part of the Energy Select Sector SPDR ETF (XLE) and they make up ~1.5% of the ETF.
Per the EIA, marketed natural gas production hit a record high of 78.8 Bcf/d in December. This production increase occurred despite lower prices and declining rig counts, according to the EIA. For 2014, production increased 6.1%—marking the strongest growth since 2011.
Marketed natural gas is the gas produced before the extraction of associated liquids like propane and butane. The removal of these liquids leaves dry natural gas.
The EIA remains bullish about natural gas production in 2015. Read Must-know: Why the EIA is bullish about natural gas production to find out more.
Continued production growth has therefore 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.
Natural gas production and consumption trends determine natural gas prices. The next part of this series analyzes whether strong consumption trends could help push prices upwards.