July 2018 Natural Gas Supply Overview And Forecast: Has The Production Reached A Mid-Term Peak?

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Includes: BOIL, DGAZ, FCG, GASX, KOLD, UGAZ, UNG
by: Bluegold Research
Summary

United States has produced some 2,423 bcf of natural gas in June this year (+11.0 y-o-y).

On a 12-month average basis, production growth rate is about to reach a mid-term peak.

Natural gas producers hate current prices.

Large charts gallery is attached (scroll down to see more).

The U.S. Energy Information Administration has recently released their natural gas monthly statistics for April 2018, but traders are looking for more recent data. In this article, we will briefly review our estimates for dry gas production and imports for the month of June, then look at our latest estimates for July and conclude with our forecast for August and September. We will also provide a brief overview of producers positioning in futures market.

JUNE OVERVIEW

According to our estimates, the United States produced a total of 2,423 bcf of natural gas in June 2018. More than two thirds of that volume (or 67.16%) was produced in shale plays (Antrim, Bakken, Woodford, Barnett, Fayetteville, Eagle Ford, Haynesville, Marcellus, Utica, Permian – see the map in the chart section below). The rest (32.84%) was produced in tight gas formations and offshore – specifically, in the Gulf of Mexico.

The share of shale gas production has been increasing almost uninterruptedly since April 2001, a trend, which does not seem to show any signs of slowing down. Indeed, in just the last year, the weight of “unconventional” dry gas output has increased by 4.6 percentage points (see chart 1 in the Charts Section below).

As before, Marcellus basin remains the top dry gas extraction area in the U.S. More than a quarter (25.1%) of all dry gas and more than a third (37.4%) of all shale dry gas produced in the U.S., is extracted here (see chart 2). However, over the past two years, other areas have grown in importance as well – notably, Haynesville, Utica and Permian. Eagle Ford also remains one of the hottest shale resource place, but its share in the overall production has been declining. Together, these top five areas – Marcellus, Permian, Haynesville, Utica and Eagle Ford – account for 53.7% of all dry gas and for about 80% of all shale dry gas produced in the U.S. (see chart 3).

According to our estimates, the United States imported a total of 244 bcf of natural gas in June 2018. Some 97% of that volume came via pipelines from Canada, the rest (3%) was imported by LNG tankers. Total natural gas supply in June was 2,667 bcf.

On a daily basis, production averaged 80.8 bcf/d (+11% y-o-y). The annual growth rate has slowed from 12% in May to 11% in June due to base effects. Imports averaged 8.13 bcf/d (+1.8% y-o-y). On a 12-month average basis, imports growth has been negative for four consecutive months now, while the production growth rate is about to reach a mid-term peak (see chart 4).

The inventory of drilled, but uncompleted wells (DUCs) continues to rise. As of June, there were a total of 7,943 DUCs in seven key shale areas (Anadarko, Appalachia, Bakken, Eagle Ford, Haynesville, Niobrara and Permian), 1,979 or 33.2% more than in June 2017 (see chart 5). However, the lion's share of that growth has been concentrated in oil-dominant areas (specifically, in Permian basin), while the growth in gas-dominant regions has been a lot less impressive.

Indeed, the total number of DUCs in Appalachia and Haynesville has been essentially flat since December 2016 (see chart 6). The difference between “wells drilled” and “wells completed” has been negative for four consecutive months now (see chart 7), meaning that DUCs inventory is likely to continue declining.

ESTIMATES AND FORECAST

Production continues to expand – especially, in Permian and Marcellus regions. We estimate that total dry gas production will average around 81.4 bcf/d in July (+11.0% y-o-y). We also estimate that imports will average 8.3 bcf/d (+2.2% y-o-y). Therefore, according to our preliminary estimates, total supply will amount to 2,780 bcf or 89.7 bcf/d (+10.0% y-o-y) in July 2018.

We expect total supply to continue expanding in August and September, but annual growth rate will slow. Currently, we expect dry gas production to average 82.0 bcf/d in August and 82.7 bcf/d in September. We expect imports to average 8.2 bcf/d in August and 8.0 bcf/d in September (see charts 8 and 9).

PRODUCERS POSITIONING

Natural gas producers are heavily long natural gas – i.e., they are not hedging their production. What does it mean? Let’s study the following two charts to see if we can find the answer. Notice the signs: A1, A2, A3, B1, B2 and B3.

Source: EIA, CFTC, Bluegold Research

  • A1 – The date is April 23, 2013. NYMEX Henry Hub strip is at $4.331 per MMBtu; NYMEX Henry Hub prompt month contract is at $4.238 per MMbtu. Producers are heavily short natural gas. They like the price, so they hedge. The cumulative net-short position in NYMEX and ICE at that time amounted to 675,134 standardized contracts, which is equivalent to 6.7 trillion bcf of natural gas. Producers are happy. They can now make plans for the future and start expanding their business. Natural gas production starts growing.
  • B1 – The date is September 8, 2015. Since producers embarked on their massive hedging program, NYMEX Henry Hub strip has lost a third of its value, while prompt month contract is down 36%. Predictably, natural gas production has grown by 14% and has peaked. Natural gas price later drops below $2 per MMBtu due to warm winter. Producers turn heavily long. Production starts declining.
  • A2 – The date is January 17, 2017. NYMEX Henry Hub strip is at $3.111 per MMBtu; NYMEX Henry Hub prompt month contract is at $3.412 per MMbtu. Once again, natural gas producers are heavily short. They like the price, so they hedge. The cumulative net-short position in NYMEX and ICE at that time amounted to 623,414 standardized contracts, which is equivalent to 6.2 trillion bcf of natural gas. Producers are happy again. They can now make plans for the future and start expanding their business. Natural gas production starts growing again.
  • A3 – The date is May 23, 2017. NYMEX Henry Hub strip is at $3.034 per MMBtu; NYMEX Henry Hub prompt month contract is at $3.219 per MMbtu. Some producers are late to the party, but still need to hedge their future production, so they add more short positions to the overall pull. The cumulative net-short position in NYMEX and ICE at that time amounted to 682,454 standardized contracts, which is equivalent to 6.8 trillion bcf of natural gas.
  • B2/B3 – The date is July 10, 2018. NYMEX Henry Hub strip is at $2.752 per MMBtu; NYMEX Henry Hub prompt month contract is at $2.788 per MMbtu. Natural gas production has increased by 14% since May 23, 2017, (just like last time, see A1-B1). Predictably, Henry Hub strip is at a two-year low. Producers do not like these prices, so they are not hedging any more. Indeed, their net-long position in NYMEX futures is some 14% above the 3-year maximum.

So, the important question is – has the production now reached a mid-term peak? The short and simple answer is – maybe. In any case, it is too early to confidently claim that it has. As already mentioned above, we still currently expect production to continue expanding, but annual growth will definitely slow. Most recently, our models started to yield lower figures – especially for the month of August. We are monitoring the situation closely and we are updating our production forecast every single day (consider signing up, if interested – see the link below).

CHARTS SECTION

Source: EIA (as of April 2015)

Chart 1

Source: EIA, Bluegold Research estimates and calculations

Chart 2

Source: EIA, Bluegold Research estimates and calculations (as of June 2018)

Chart 3

Source: EIA, Bluegold Research estimates and calculations (as of June 2018)

Chart 4

Source: EIA, Bluegold Research estimates and calculations (as of June 2018)

Chart 5

Source: EIA, Bluegold Research estimates and calculations (as of June 2018)

Chart 6

Source: EIA, Bluegold Research estimates and calculations (as of June 2018)

Chart 7

Source: EIA, Bluegold Research estimates and calculations (as of May 2018)

Chart 8

Source: EIA, Bluegold Research estimates and calculations (as of July 2018)

Chart 9

Source: EIA, Bluegold Research estimates and calculations (as of July, 2018)

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.