Relentless Natural Gas Supply Keeps Up the Pressure on Prices

Based on data from Bentek Energy, an energy market analytics company, the EIA (U.S. Energy Information Administration) reported that total natural gas supply increased 0.4% in the week ended August 5 compared to the week ended July 29. Supply levels are currently 5.5% greater than they were in the corresponding week last year.

Total marketed production for May, the latest month for which the EIA has data, was ~78.3 Bcf (billion cubic feet) per day. Marketed natural gas is the gas produced before associated liquids including propane and butane are extracted. The removal of these liquids leaves dry natural gas.

The EIA remains bullish about natural gas supply in 2015. The EIA’s July “Short-Term Energy Outlook,” released on July 7, projects that total marketed natural gas production will grow 5.7% over 2014, to 78.97 Bcf per day in 2015, and by 2% more to 80.56 Bcf per day in 2016. It pegs total marketed natural gas production at 74.72 Bcf per day in 2014.

Continued production growth may pressure natural gas prices (UNG) if demand doesn’t match this supply. Weak prices are likely to hurt gas-producing companies including Noble Energy (NBL), Range Resources (RRC), and Antero Resources (AR). These companies make up 1.5% of the iShares U.S. Energy ETF (IYE).

Higher production, however, could benefit MLPs such as Plains All American Pipeline Partners (PAA), as it means more volume to transport. Having said that, if prices fall continuously, producers may respond by cutting production. This could be negative for some MLPs.

The next STEO is expected to come out on August 11.

Natural gas inventories and prices are governed by both natural gas production and consumption trends. In the next part of this series, we’ll take a look at natural gas consumption trends.