Natural Gas Market Indicators: July 15, 2014

As the northern hemisphere summer is half way through, perhaps it is a good time to take stock of where we are at.

On the supply front, production is as strong as it has ever been, with near record-breaking levels of dry gas produced at volumes more than 68 Bcf per day since June. Supplies directed toward storage have been similarly robust with a record setting eight straight weeks of 100+ Bcf injections since May. In other words, production is solid and supplies are rebuilding.

On the demand side, cooler summer temperatures compared with 2013 have eased power burn demand this July by nearly 2 Bcf. Industrial and residential-commercial demand are up slightly, as well as exports to Mexico. Therefore, the decline in July demand overall relative to last year is only 0.6 Bcf per day.

The result of this supply demand balance is a natural gas price at Henry Hub of $4.11 per MMBtu – well below where the summer season began. This suggests that the market sees a sturdy supply portfolio that is able to meet both short-term demand pulls and seasonal storage obligations as operators refill for next winter. In other words, the market is behaving in an expected fashion. 

Please direct questions and comments to Chris McGill at cmcgill@aga.org or Richard Meyer at rmeyer@aga.org.

Reported Prices – US natural gas prices have softened during the past two weeks. At $4.11
per MMBtu, prompt-month prices have fallen by 30 to 40 cents since late June. Strong
injections into storage and cooler weather relative to last year has likely contributed to the
easing on prices. Looking to global oil markets, new supplies and the relaxation of geopolitical fears has pulled Brent crude oil prices down since May. Brent crude futures are currently a shade under $105 per barrel, while West Texas Intermediate trades below $100 per barrel.

Weather – the Atlantic Basin counted its first hurricane of the season as of Independence Day
weekend. Tropical Storm Arthur was upgraded to a category 1 hurricane on July 3 and served as quite the holiday disruption for many on the eastern seaboard. Because of its location, Arthur did not cause any interruption to hydrocarbon production in the Gulf of Mexico. Weather so far this cooling season has produced temperatures 12.8 percent warmer than normal since May, but 2.6 cooler than last year. All divisions of the country have been warmer than normal last year cumulatively since May 1.

Working Gas in Underground Storage – after a record setting eight straight weeks of 100+ Bcf injections of natural gas into storage, the EIA reports that the streak was broken. For the week ending July 4, volumes into storage totaled 93 Bcf, a strong showing compared with average of 72 Bcf for the same week during the past five years. Underground stocks are 28 percent behind the five-year average, but strong injection volumes are closing that gap. Volumes into storage have averaged 15.4 Bcf per day since May 9 and as of the most recent storage report exactly 1,200 Bcf of natural gas stocks have been rebuilt since the injection season began in late March.

Natural Gas Production – domestic dry gas production has been consistently strong this summer, bolstering the supply picture as the summer pushes ahead. At 68.4 Bcf per day in July, dry production is 3.2 Bcf per day more than last year – an increase of 4.9 percent. Produced volumes have stayed above 68 Bcf per day since mid-June with only a few daily exceptions. The production increase has come from the Northeast and Midwest, according to Bentek Energy LLC, while volumes produced in the South and West have declined slightly, though not nearly enough to offset the substantial growth in the Northeast.

Shale Gas – the EIA "Drilling Productivity Report" released each month delivers a snapshot of new and existing well production per rig for both oil and gas operations in each of the major producing regions. For July 2014, the rig-weighted average new well gas production per rig across the six key production fields is 1.4 MMcf per day, up from the prior month. Marcellus leads the pack at 6.6 MMcf per day of new-well gas production per rig, with the Haynesville not far behind at 5.3 MMcf per day. When gas production is aggregated across regions, 39.7 Bcf per day of production is noted across the six fields with Marcellus again leading the pack at 15.2 Bcf per day.

Rig Counts – US rotary rigs in operation totaled 1,875 for the week ending July 11. This represents a 116 rig increase from one year prior, a jump of 6.5 percent. The oil-to-gas split remains more than 4 to 1 oil to natural gas. Breaking out rig activity by directionality, the sum of directional and horizontal rigs outpaces vertical rigs nearly 4 to 1 as well.

Pipeline Imports and Exports – strong imports from Canada into the Midwest have been offset by declines in volumes to the Northeast and West this July. Volumes into the Northeast have declined 78 percent to 60 MMcf per day. Volumes into the west at 2.29 Bcf per day during the same period have lost about 0.5 Bcf from last year at the time. At 4.8 Bcf per day, total Canadian imports into the US are 7.9 percent below last year. The year to date totals show less variation from last year having increased less than a percent even with the substantially colder winter during first quarter. Exports to Mexico are up nearly 0.5 Bcf per day from last July to 2.4 Bcf per day. Most of the volumes are flowing south of the border through Texas, though 0.6 Bcf per day are sourced from the Southwest.

Natural Gas Market Summary – as the northern hemisphere summer is half way through, perhaps it is a good time to take stock of where we are at. On the supply front: production is as strong as it has ever been, with near record-breaking levels of dry gas produced at volumes more than 68 Bcf per day since June. Supplies directed toward storage have been similarly robust with a record setting 8 straight weeks of 100+ Bcf injections since May. In other words, production is solid and supplies are rebuilding. On the demand side: cooler summer temperatures compared with 2013 have eased power burn demand this July by nearly 2 Bcf. Industrial and residential-commercial demand are up slightly, as well as exports to Mexico, so the decline in July demand overall relative to last year is only 0.6 Bcf per day. The result of this supply demand balance is a natural gas price at Henry Hub of $4.11 per MMBtu – well below where the summer season began. This suggests that the market sees a sturdy supply portfolio that is able to meet both short-term demand pulls and seasonal storage obligations as operators refill for next winter. In other words, the market is behaving in an expected fashion.

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