If there is no storage capacity available, and demand is maxed out, then production must be curtailed. At today’s rate of production and normalized demand, there will be no more storage capacity available at some point during the summer of 2012. Will this result in a price crash of biblical proportions? Or are we already starting to see producers cutting back, and coming to their collective senses? Let’s take a look at the numbers.
If you compare EIA’s U.S. average daily dry natural gas production for the first 11 months of 2010 with the first 11 months of 2011, total production is up by 4.6 Bcf/d or about 8%. That comes as no surprise to anyone who has followed natural gas markets over the past few months. It is also no surprise that the rate of growth has slowed down in recent weeks. One way to see this trend is in EIA’s Natural Gas Weekly Update, which reports the weekly change in production based on BENTEK data.
The EIA weekly change in natural gas production posted yesterday was -0.64%, the second largest decline since EIA started tracking these numbers. In fact, in four out of the past five weeks EIA’s delta production change has been a negative value. Does this mean that the turn has come? That producers in aggregate  are cutting back? Not necessarily. Production estimates based on pipeline flow modeling have a certain inherent level of noise in the numbers. Only when a trend has been established over several days or weeks can it be treated as definitive fact. Even then, changes in the market can impact the trajectory of the trend. So we’ll need to wait a while to determine if we are there yet.
But even if the turn comes soon, will it be soon enough, and material enough to make a difference?
Let’s say we end the withdrawal season with 2.2-2.4 TCF remaining in storage. That seems to be the general market consensus. Last year between April 8th and November 18th (that is 231 days), 2.3 TCF was injected into storage. That would bring the total to 4.5-4.7 TCF --- Well above the maximum reached last year of 3.9 TCF, and over EIA’s most recent estimate of total storage capacity of 4.3ish TCF. But the level of production has been running 4.6 Bcf/d ABOVE last year. If we multiply 4.6 by 231, we get another 1.1 TCF, putting end of injection season storage at 5.6-5.8 TCF. That’s a lot of gas. Let’s assume the midpoint, 5.7 TCF. To stay within EIA’s max capacity number, production would need to be cutback by 6 Bcf/d for 231 days. That sounds like a lot. But it turns out November 2010 production is just over 6 Bcf/d under November 2011. To balance the market, “ALL” producers need to do is to roll back to this point a year ago. Sort of like that “dream” 84-85 season on Dallas where Bobby died at the end of the season, but came back the next year.
It might not be that difficult. Because all of the balancing does not have to come from producers. If coal-to-gas fuel switching chewed up 3 Bcf/d and production declines (not shut-ins) cut another 3 Bcf/d, it could happen. Could $2.50/MMbtu gas for 231 days yield that result? Very possibly.
These analytics are of the quick-and-dirty variety, and could use a lot of refinement. But we can reach a few conclusions based on these numbers.
1. A small decline in production will not get this market back in balance. It will need to be a reasonably healthy inflection point.
2. Producers don’t have to bear the entire burden. At these prices, the power sector will use a lot more gas.
3. Sometime relatively soon we need to see a correction in the imbalance of about 6 Bcf/d. The alternative?
 Marketed production less extraction loss. In other words, gas sold as natural gas. Not to be confused with dry and wet gas production.
 The evidence over the past few months is that dry natural gas production has been declining, but has been offset by increasing wet and associated gas production, keeping the aggregate level flat to slightly increasing. A decline in the aggregate (in total natural gas production) would require a much steeper fall in the level of dry gas production – so much so that wet and associated gas would no longer make up the difference. That is probably what is going to happen.