NATURAL GAS PRODUCTION HAS STABILIZED, BUT WILL IT BEGIN TO DECLINE?
By Walter Kurtz, Sober Look
As natural gas prices continue to collapse (nearing $1.9), we are starting to hear more talk about production cuts.
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| Natural gas nearby futures contract price |
But the market remains skeptical.
WP: “Companies can talk all they want about reducing production, but until we start seeing a difference, prices are going to fall,” independent analyst and trader Stephen Schork said.
Part of this skepticism is driven by the inventory levels which are still extremely high relative to historical ranges.
With massive amounts of new gas coming out of the Marcellus formation, are companies actually trying to cut production? The chart below shows that production, though still at historically record levels, has indeed leveled off.
EIA: After a long period of steady growth, U.S. daily dry gas production growth leveled off during the first three months of 2012, averaging 63.8 Bcfd through March 31, a level almost 9% above the same period in 2011.
But in order for gas prices to stabilize, the market is looking for production to start declining materially. In an environment where production quotas are not permitted by law (the way that OPEC does with crude production), each firm would need to cut output on its own in order to stem the flow of gas. It’s a tough decision because the lower the price the more companies want to pump to generate their target revenue – until of course the margins are no longer there and sales begin to generate losses.
5 Comments
These figures are a bit tough to believe given that: 1. the EIA released the natural gas monthly and Jan dry gas production was over 66 bcf/day whereas this chart shows that at no time in Jan did production exceed 65 bcf/day and 2. these are estimates from a private company (although I haven’t tracked their historic estimates vs real results and also don’t know their sampling methodology.)
The EIA data does get revised, but I can’t remember ever seeing a revision of 3-4% to come close to these estimates.
The NatGas market will clear, stabilize and recover.
NatGas is such a huge bargain in the North American energy market that users worldwide are paying attention. Usage is growing dramatically and new uses are ramping up (transportation). Energy intensive businesses worldwide are seeing US industrial opportunities like never before. Cheap NatGas will by itself have a dramatic effect on US industrial recovery.
Political leadership that is truly interested in the larger good for the US will begin to support it in a meaningful way.
All but the most ideological hard-core environmentalists see NatGas as the least worst fossil fuel and a good substitute until technology provides other solutions.
Companies that are producing fields below cost will cut production or produce themselves out of business.
Lots of older fields developed at higher price levels are now producing below cost and if they haven’t previously been shut-in they soon will be. Paying shut-in royalties is often times very good business.
I agree with Old Dog, but have no idea when the natural gas market will stabilize. I suspect it will take longer for the various industries to complete the switch to natural gas than we might think.
There are numerous great posts on TheOilDrum on this topic from people who know a lot more about the topic that I do (such as this one http://www.theoildrum.com/node/8859 ) , however the key is to wait until the trend has clearly turned since a meaningful increase in demand from something other that a cold winter is likely years away…
I hear Israel could use a little NG right now.