January 26, 2016
By: Matthew Mattingly
When discussing natural gas production in the United States, a phrase that I have been using a lot lately is “in the face of.” Although one of my colleagues isn’t fond of the phrase, “in the face of” is just another way to say “even though,” “in defiance of,” or “despite.” To me it perfectly describes natural gas production in the US, because even though other market fundamentals point to a fall in US natural gas production the opposite scenario has occurred. In order to drive the point home (and to drive my colleague a little crazy) I am going to quickly discuss market fundamentals that previously had an impact in the market, but in the face of the following fundamentals, productions has continued to rise.
Rig Counts
Historically, rig count numbers correlate to production. The higher the rig count translated into an increase in production. That is no longer the case in the shale gas/fracking era. Rig counts have fallen dramatically over the last year. In fact, over the last 13 months they have dropped by nearly 70%. However, in the face of falling rig counts production has continued to rise.
Falling Natural Gas Prices
It wasn’t long ago when many analysts viewed the breakeven mark for natural gas fracking production at $4.00/MMBtu. It didn’t always occur but in 2010, 2011, and 2014 the NYMEX market did settle on an average above $4.00/MMBtu. However, producers were always guaranteed to make at least $4.00/MMBtu or more in the forward market due to the price contango that existed in the forward curve. But 2015 changed everything. Pricing dropped dramatically due to the excess natural gas supply and the contango seen in the forward curve flattened. However, in the face of falling natural gas prices, production remains at over 80 Bcf/Day and is expected to grow.
Falling Oil Prices
Even with the low natural gas prices the market has experienced over the years, U.S. producers could still rely on the high price of oil to ensure they turned a profit. While natural gas prices were trading at $4.00/MMBtu or below, oil prices were ranging from $80-$110/bll for most of 2010-2014. With high oil prices and over 20% of natural gas production coming from associated gas from oil, producers could endure low natural gas pricing. Then in late 2014 oil price started to collapse and has not been able to recover. Currently, oil is trading in the low $30s per barrel and is expected to continue to be deflated in 2016. In the face of falling oil prices, natural gas production has only grown and expected to continue in 2016.
Summary
The latest white paper by Choice Energy Services “NYMEX Update – Bulls & Bears” goes into further detail about natural gas production and how it has been able to grow in the face of the above market fundamentals. Eventually, market fundamentals are expected to impact the supply/demand levels of natural gas. However, the real question remains of when exactly that will occur? As of now, it will not be happening soon enough for producers.
Confidential: Choice Energy Services Retail, LP.
