Market area capacity constraints in the Producing Area and in the West are virtually unavoidable.
Where is all this gas going to go? No one knows, because no one has ever been in a market like this.
Therefore, no one can reasonably explain why the NYMEX is doing what the NYMEX is doing, i.e. the Henry Hub futures contract rallied upon hearing storage in the Gulf is now within 2.8% or 33 Bcf of capacity.
The question is not will gas displace gas, but rather, where and when will it occur?
In essence, gas is cannibalizing itself, yet the NYMEX rallied. We must respect this rally, even though we do not understand the whys and wherefores of its origin… especially because we don’t understand. We know the bulls have gotten some recent help by a cold air mass currently over the Chicago area and a bullish winter weather forecast. Yet gas is still getting into the ground. We also know the bulls are trying the spin the case of the precipitous drop in the rig counts, but gas is still getting produced regardless.
To wit, one of our readers, who runs the largest consulting firm specializing in the hydraulic fracture stimulation of oil and gas wells, observed last week…
“Activity level has really turned up. All of these horizontal projects are intense and the technology is moving very fast. One of the recent graphs [The Schork Report, September 9, 2009] showing the average gas rate per well compared to prior years tells a lot. I saw one in a Morgan Stanley report recently too. We have been waiting for the analysts to catch up with this fact. The rig count reduction as applies supply was misleading….. The oil and gas producers have been through these cycles many times and know how to tighten up and high grade projects… One extreme dictates another. I would be careful about a bullish gas stance next year and I have no faith in an increase in industrial demand…” Billy Aud, President of Integrated Petroleum Technologies, Inc.
There you have it… a view from the front lines… not Wall Street. High-grading, i.e. the shuttering of production at the fringe (less productive, low return plays) is skewing the drop in the Baker Hughes count.