Natural Gas Production Rises Pushing Market Back Into Surplus

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Includes: BOIL, DGAZ, GAZB, KOLD, UGAZ, UNG, UNL
by: HFIR Energy
Summary

Last week saw EIA report +65 Bcf for the week ending July 26. This was higher than our forecast of +58 Bcf and higher than the consensus average of +57.

For the week ending 8/2, we have a build of +55 Bcf. EOS is now 3.70 Tcf.

The natural gas market is expected to flip back into a surplus in the coming weeks.

Lower-48 production recently surpassed ~91 Bcf/d, with our forecast predicting it will end the year at ~93 Bcf/d. This will keep the market in surplus.

In order for prices to sustainably move higher along the curve, natural gas production needs to decline by ~5 Bcf/d from the expected ~93 Bcf/d to ~88 Bcf/d.

Welcome to the natural gas production edition of Natural Gas Daily!

Last week saw EIA report +65 Bcf for the week ending July 26. This was higher than our forecast of +58 Bcf and higher than the consensus average of +57 Bcf.

Source: EIA

This Week's Estimate

For the week ending 8/2, we have a build of +55 Bcf. EOS is now 3.70 Tcf.

Natural gas production rises pushing the market back into surplus

The natural gas market is expected to flip back into a surplus in the coming weeks.

Our estimate shows the market will be oversupplied by ~1.51 Bcf/d. This is because we are seeing natural gas production climb, while the benefits of higher power burn resulting from lower natural gas prices have already taken effect.

On the production front, we saw a brief spike in the beginning of July before it faded off. We have now seen a similar pickup in the last week. Lower 48 production surpassed ~91 Bcf/d. If our projection is correct, Lower 48 production should gain about ~2 Bcf/d into year-end from a combination of higher associated gas production and Northeast gas production.

This will in effect keep the broader natural gas market in oversupply territory despite the ramp-up in LNG we expect by year-end.

Keep in mind also that in order for the market to truly balance, it's not enough for production to stay flat around ~91 to ~92 Bcf/d; you would really need a decline in production. The reason we say this is that weather volatility inherently pushes demand higher or lower than the supply from time to time. So in order for prices to be sustainably higher, the market must be in a comfortable deficit.

Another issue that the natural gas market will have to contend with going forward is the influx of Canadian natural gas if the US market does go into undersupply.

As you can see from the chart above, we estimate there's ~2 Bcf/d of Canadian gas that can enter the US to displace any shortages.

If you put the figures together, in order for natural gas prices to sustainably move higher (we aren't talking about short-term pops but a curve movement), the market needs to see Lower 48 production decline by ~5 Bcf/d. Production would need to fall from the expected ~93 Bcf/d to ~88 Bcf/d.

This is still a tough ask given associated gas production in the US is climbing while Northeast producers have not signaled a decline in production but a mere pullback in growth.

Our view remains bearish on the natural gas market in the medium term. We continue to trade natural gas for short-term moves, but we don't see prices moving sustainably higher.

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.