Natural Gas Drops Below $3 on Record Output, Stocks Suffer - Analyst Blog
The supply glut from the shale drilling bonanza meant that December was another record-setting month for U.S. natural gas production from the Lower 48 states.
As per the latest report from Bentek Energy – the forecasting unit of Platts – December natural gas production was up 3.6% from November to 72.8 billion cubic feet per day (Bcf/d), the highest monthly average ever. In fact, the December output was 11.6% higher year-over-year, while hitting a daily record of 73.6 Bcf on the 20th of the month.
Thanks to the emergence of major shale plays yielding impressive results, Bentek analysis further suggests that average domestic natural gas supply climbed to 68.4 Bcf/d in 2014. To put things in perspective, U.S. production was averaging just 55.1 Bcf/d in 2009, only five years back.
The Shale Revolution
Over the last few years, a quiet revolution has been reshaping the energy business in the U.S. The success of ‘shale gas’ – natural gas trapped within dense sedimentary rock formations or shale formations – has transformed domestic energy supply, with a potentially inexpensive and abundant new source of fuel for the world’s largest energy consumer.
With the advent of hydraulic fracturing (or fracking) – a method used to extract natural gas by blasting underground rock formations with a mixture of water, sand and chemicals – shale gas production is now booming in the U.S. Coupled with sophisticated horizontal drilling equipment that can drill and extract gas from shale formations, the new technology is being hailed as a breakthrough in U.S. energy supplies, playing a key role in boosting domestic natural gas reserves.
As a result, once faced with a looming deficit, natural gas is now available in abundance.
Growing Demand Supply Imbalance Pressurizes Price
While December becomes the twelfth consecutive record-breaking month of 2014 in terms of natural gas output, the commodity’s demand has failed to keep pace with this rapid supply surge. Industrial requirement has been lackluster over the past two years with demand rising by a meager 0.5 Bcf per day in both 2012 and 2013.
The Result: Prices Continue to Suffer
To make matters worse, mild weather across most of the country through the first months of winter has curbed natural gas demand for heating. As a result, prices continue to suffer.
From a peak of about $13.50 per million British thermal units (MMBtu) in 2008 to below $3 now – sinking in between to a 10-year low of under $2 in 2012 – the plummeting value of natural gas represents a decline of around 80% over seven years. In the absence of major production cuts, we do not expect much upside in gas prices in the near term.
With recent natural gas stock withdrawals continuing to underperform the historical norms on the back of strength in production and moderate temperatures, the commodity’s near-to-medium term fundamentals remain rather lukewarm.
Limited Upside for ‘Gassy’ Companies
This translates into limited upside for natural gas-weighted companies. In particular, those with Zacks Rank #4 (Sell) or Zacks Rank #5 (Strong Sell) like EOG Resources Inc. (EOG), Range Resources Corp. (RRC), Penn Virginia Corp. (PVA), Bonanza Creek Energy Inc. (BCEI), Cabot Oil & Gas Corp. (COG), Ultra Petroleum Corp. (UPL) and Comstock Resources Inc. (CRK) look to be in the most trouble.
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