Schork Outlook: Why NatGas Prices Won't Rise
Lack of demand…NG Supply is here to stay
Last week the EIA released its 914 monthly survey of natural gas production, which contains more detailed data than the weekly storage release. To no one’s surprise, total U.S. gross withdrawals rose to 78.58 Bcf/d, a 0.5% increase on the month and a 6.77% YoY increase. In fact this marks the third consecutive increase and the highest absolute level on record.
Yet more so than the big picture number, we are interested in the regional breakdown. The New York Times recently released an article casting doubt on whether shale production is overstated. In June 28th’s edition of The Schork Report, we addressed the NYT piece, writing that the article was “more or less, a he-said/she-said summation of dueling opinions within the EIA’s pecking order. In this vein, we gave the article short shrift.” The latest EIA data does nothing to change our mind.
Per the EIA’s regional breakdown in the monthly report, traditional sources of domestic gas appear flat — Texas is only 0.9% above 2009, Oklahoma 1.98% higher and New Mexico 8.04% lower over the same timestep.
Instead, the largest growth levels come from two areas with two causes. The first is Louisiana, which sees production 2.0% higher on the month and 102.23% above 2009 levels. This is due to the advent of horizontal drilling. According to Baker Hughes, the number of horizontal rigs has increased by 153.13% between 2009 and 2011. As illustrated in today’s issue of The Schork Report, the correlation between horizontal rigs and Louisiana withdrawals stands at an exceedingly strong 0.966 (1 implies perfect correlation). Put simply, more horizontal rigs lead to higher production in Louisiana.
Looking ahead, drill data is available on a weekly basis, which means we have data available up to July 2011, which has seen 1073 drills on average (the highest level ever recorded) as compared to 1014 in April. Our regression implies that we could see withdrawals as high as 8.518 Bcf/d from Louisiana by July as compared to April’s 8.15 Bcf/d levels.
The second major source of withdrawals stems from ‘other states (excluding Alaska)’ which has increased 30.95% since April 2009. As readers can probably guess, we place this growth firmly on shale plays.
Higher shale production is hardly breaking news, but what is interesting, and going directly in the face of the New York Times article, is that the pace of shale development is increasing, not decreasing. Consider the ‘Rate of change’ (RoC), a technical indicator that measures momentum behind price movements. In today’s issue of The Schork Report we apply this indicator to withdrawals in the other states field, and illustrate a rapid increase in the RoC.
We initially saw rising RoC in the post-2005 timestep when shales began to gain nationwide acceptance. Later, we saw a drop in the RoC during the recession as capital investment slowed and natural gas prices fell. The RoC has recently surged to an all-time high of 0.174 in February 2011 and a level of 0.173 in April 2011. This implies higher production levels in the short term at least.
The bottom line is that the flood of natural gas is here to stay, and it will take significant increases in demand (rather than speculative articles) if we are to see natural gas prices recover to 6.000 and above.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.