Revisiting The Forgotten Commodity – Weekly Review from Oilpro

Good Morning Oilpro Readers!

In the US, the “G” in O&G seems all but forgotten. Years of depressed natural gas prices coupled with the industry’s recent oil price obsession have quieted the natural gas conversation. This week marks the start of the traditional winter withdrawal season (Nov. 1 – Mar. 31), making it a good time to revisit our industry’s red-headed stepchild.

Although Henry Hub spot price spikes are possible on cold snaps this winter, the 2015/2016 heating season outlook is unfavorable with two leading forecasters calling for a winter 3% to 9% warmer than last year. The US natural gas strip has averaged less than $3 this year, and winter demand seems unlikely to break the price ceiling.

Because of the natural gas price depression, gas drilling today (197 rigs) is just a fraction of what it was at the 2008 peak (1,600 rigs). But some operators are still making good returns in shale gas plays, forging a “more with less” path that oil producers may have to follow. A few days ago, EP Energy said longer laterals and completion changes on their Haynesville shale gas wells yield “excellent” returns down at $2 nat gas – a remarkable statement as the Haynesville gas break even price was thought to be around $5 just a few years ago.

Earlier this week, EIA crude oil data released through September showed a 169,000 bpd drop in US oil production. It’s early, but oil production seems more closely correlated with drilling rigs than natural gas production, which never really responded to less drilling thanks to more productive wells and associated gas from oil drilling.

This associated gas comes from the Big 3 oil plays, which now account for 20% of US gas production. The rapid growth of this associated gas wedge should fall off alongside the oil well count. Last summer, the US oil rig to gas rig ratio was 5:1. Today there are less than 3 rigs drilling oil wells for each rig drilling gas wells.

Direct upstream natural gas activity today is Northeast-centric, with 1/3rd of the active US natural gas rigs located in the region. Pipeline inadequacies in the Northeast have slowed Marcellus production growth, meaning pent up supply will likely keep natural gas prices in check throughout 2016 and beyond.

On the demand side, front-month gas currently trades below coal equivalents, meaning coal-to-gas switching is likely to continue this winter. Coal consumed by the electric power sector is averaging about 9% below 2014 levels this year, while gas consumption is up 19%. Meanwhile, the US is expected to become a net exporter of natural gas for the first time during the next 12-24 months. But oversupply still trumps new demand, limiting upside from here. Producers that feel like they are bringing sand to the beach shouldn’t expect a change any time soon. — Joseph Triepke, Oilpro Managing Director

Source: Weekly Review email from Oilpro