Shale gale crushing natural gas prices

Nomac Drilling Corp. floorman steadies a section of drill pipe and cleans the connection during natural gas drilling operations for Chesapeake Energy Corp. in Bradford County, Pennsylvania.
Daniel Acker | Bloomberg | Getty Images
Nomac Drilling Corp. floorman steadies a section of drill pipe and cleans the connection during natural gas drilling operations for Chesapeake Energy Corp. in Bradford County, Pennsylvania.

Natural gas is the cheapest it's been in nearly two decades, and it could get even cheaper, thanks to U.S. shale drillers.

The U.S. is producing at a near-record pace, but the warm winter has only resulted in more oversupply as the industry heads into the time of year when it starts to store fuel for the next winter. Natural gas futures for April were trading at $1.64 per million BTUs Thursday, the lowest level since late February 1999.

"The Northeast has been the main driver of the growth this winter, really contributing to those record highs. It's also been the driving force of the entire shale revolution of the past five years," said Thad Walker, Platts Bentek energy analyst. In the last decade, the U.S. was looking to import natural gas, but the "shale gale" has resulted instead in massive oversupply.

The latest government data aren't helping. Natural gas futures sank even further Thursday after the weekly storage report showed demand for natural gas last week was well below normal. The U.S. Energy Information Administration said domestic inventories fell by 48 billion cubic feet last week, a shocker when compared to the normal 137 bcf decline usually seen at this time of year.

"Demand hasn't been there and production is so high, and that's a nasty combination," said Bart Melek, head of commodity strategy at TD Securities. "We're still getting a lot of stuff out of the Marcellus. Low prices aren't a deterrent." The Marcellus shale stretches from Upstate New York, down to Pennsylvania to West Virginia and over to Ohio. According to December data, drillers in Texas and New Mexico saw a decline in production but Ohio and Pennsylvania continued to add production.

Producers such as Chesapeake Energy, Corp, Cabot Oil and Gas, and Rice Energy are among the companies active in that area. Chesapeake, a pioneer in shale gas, was founded by Aubrey McClendon, who died in a single-car accident Wednesday, the day after he was charged with conspiring to rig bids for oil and gas leases. McClendon no longer was associated with Chesapeake, and the company said it does not expect to face criminal charges.

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While producers have closed in some wells, others are being added. Walker said the one reason for the production increase could be that producers moved ahead to complete wells, based on the view at the end of last year, that prices were bound to improve. The futures curve also showed higher future prices.

Citigroup analysts, in a report this week also note that the increase in production in Marcellus and Utica paralleled increases in pipeline capacity.

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"Matching November's strong uptick, Pennsylvania once again posted the largest sequential increase with production of 0.4 Bcf/d for the second-straight month. Despite continued curtailments in the region given low natural gas prices, significant new takeaway capacity came online in late 2015," wrote the analysts in a recent report. "We now estimate Marcellus natural gas production increased by 2.0 Bcf/d and that Utica volumes were up 1.3 Bcf/d on average, in 2015 due to additional pipeline capacity coming online in Q4'15."

The analysts noted that onshore gas production fell in December to 77.7 Bcf/d, a drop of 0.5 Bcf/d from November, but it was 1.6 Bcf per day higher than the year earlier.

U.S. inventories now stand at 2.536 trillion cubic feet, 45 percent higher than last year's levels and 35.6 percent above the five-year average, according to the EIA weekly report.

In its latest monthly report, EIA said production was at 91.1 billion cubic feet per day in December, down from a high of 91.7 billion cubic feet in September.

Walker said that by Bentek's measure, which differs from the EIA, there was one day last month when dry gas production actually reached an all-time high.

Bentek estimates dry gas production in the lower 48 U.S. states hit a record Feb.19 of 73.83 Bcf/d. February dry gas production averaged 73.23 Bcf/d, a monthly average that is higher than all but 13 days ever. The previous monthly record occurred in September 2015, at an average 72.62 Bcf/d.

There could be some pickup in gas prices in the next several months, but a big move higher is not immediately expected, analysts said.

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"The jet stream is being pushed up north by El Nino. That would allow some hot weather to come our way in late spring. There's been so many cutbacks in rigs, and so much displaced coal, the balance sheet for natural gas might show some signs of improvement," said John Kilduff, partner with Again Capital.

Melek has a forecast of about $2.60 per million BTUs by the end of the year, but he said it keeps declining there is technical support at $1.35, a 1995 low.

Walker said he expects gas prices to move lower for a couple of months before moving higher, to a point where it could be $3 per million BTUs by early next year.

Bentek expects production peaked in February and will start to decline throughout the year, but there should be incremental demand from LNG, power, and exports to Mexico,

Globally there is an oversupply of natural gas, and the U.S. launched the first LNG cargo into the world market last week, with Cheniere's shipment to Brazil. U.S. gas is priced off of Henry Hub prices, while some foreign markets link gas prices to oil, also near multiyear lows.

"Demand in key consuming regions like the U.S. Midwest, Eastern Seaboard, southern Ontario, hasn't been as robust. So we're coming into the so-called injections season with a lot of gas, and to add insult to injury, distillate prices are also low," said Melek.