Understanding the natural gas market is not for the faint hearted. Natural gas production recently returned to record levels last seen before prices fell through the floor. How could that happen in the face of record storage levels? It’s all par for the course - in a world where the threat of a major Hurricane no longer impacts the price of natural gas (NYMEX Natural gas closed down 4 cents at $2.614 yesterday). Today we will look at buoyant natural gas production levels.
Yesterday our friends at Bentek reported that last week’s average US gas production was 64.5 Bcf/d - close to the all time high of 64.7 Bcf/d set in November 2011. Natural gas in storage continued to set records. Last week the Energy Information Administration (EIA) reported a 47 Bcf storage injection - leaving total storage at 3.308 TCF - 400 BCF above last year’s level at this time. During August NYMEX natural gas prices have retreated again to $2.614/MMbtu after rallying over $3.00/MMbtu in July. Prices have fallen 13 percent year to date.
Why is gas production at record levels even though storage is higher than ever and prices are weak? Didn’t all the drilling switch to wet gas plays? Gas production should be in retreat until prices get back to $5.00/MMbtu right? As is so often the case in the world of shale gas these days, what is actually happening is not what you would expect to be happening. Take gas production for instance. The data shows (see chart above) that US residual or dry gas production has been growing steadily since the start of the shale gas revolution in 2005. The rate of increase in production took off in 2010 and continued through 2011 - only retreating in the first quarter of 2012 as prices fell below $3.00/MMbtu in January and then below $2.00 in early April. If ever there was a time to put the brakes on and stop producing more gas – that was the time.
However, seemingly in defiance of common sense - production has picked right back up again since then and returned close to record levels. The chart below shows a close up of this year’s production (Bentek numbers) using a 30-day average to smooth out the noise. You can see that production has risen since the start of July, appeared to stall in mid-August and then increased again in the past two weeks. These step-like increases in production likely reflect infrastructure (gathering systems) coming online to provide new takeaway capacity.
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