The lure of higher priced oil continues to take its toll on the gas drilling industry. The number of rigs actively drilling for gas declined by -29 last week to 389 and a 14-year low. Meanwhile gas production is still rising.
Total drilling rigs increased by +2 to 1,748 thanks to active oil rigs rising by a whopping 30 rigs to 1,354. The decline in gas rigs pushed the active total to nearly 75% below the 2008 peak. Cheap gas prices are making it uneconomical to drill for gas in the marginal areas surrounding the fairway in the shale plays. Those companies lucky enough to get leases in the fairway where gas it plentiful and wet are still making a small profit from their efforts. Those with leases outside the fairway where liquids are scarce and gas is less prolific are having a hard time. Unfortunately most companies have to drill anyway to secure the leases with production. That means they are drilling the minimum number of wells to hold the lease and moving on to the next location. When gas prices eventually rise they will come back to these marginal leases and drill them out.
It could take years or even decades before they return to drill in the fringe areas. With costs going up every year and gas production rising it could be a long time before the economics work again.
With roughly 2,000 oil wells drilled every month the incremental production of associated gas is huge. New gas fields have been discovered in the Gulf of Mexico shelf that could contain 100 Tcf of easy to produce conventional gas. That will be good for the pipeline companies. The Gulf used to be 25% of the nations gas production and has declined to only 6.6%. The pipelines from the Gulf are used to handling 3-4 times the current rate of production. The drilling moratorium in 2010 delayed new production by 12-18 months. The recertification of rigs according to the new BSEE rules pushed new wells back another 12 months in some cases because of a shortage of replacement equipment up to code. The cheap gas prices also caused drillers to devote efforts to oil exploration rather than gas. That decline in gas production is just now starting to rebuild.
Supplies of gas in storage reached a record high of 3.929 Tcf on November 2nd. Because of the winter demand cycle the gas in storage has declined to 1.781 Tcf as of last week. That is still 3.5% over the five-year average and winter is over. The first week of positive injections should be near and the entire cycle of replenishment begins again.
In the U.S. we don't have enough gas production on a daily basis to fuel the nation during the winter months. To remedy this we produce gas and inject it into storage year round and that storage provides the buffer for supply in the winter months. Analysts expect gas in storage to reach a new record this year of 4.0 Tcf and the technical limit of existing storage. January consumption was 92.40 Bcf per day and a two year high. That was +15.8% higher than December. January weather was 11.5% colder than January 2012 and gas demand was +4.1% higher. Residential gas demand rose +32% from December levels to 28.4 Bcf per day.
The EIA said marketed production declined in January by -0.59 Bcf to 67.6 Bcf per day. The small decline in production is related to "freeze outs" where wells quit working when the weather turned cold. These will restart as the weather warms. That could be things like generators failing to start, valves frozen, etc. Output from Wyoming and New Mexico fell to the lowest level in years as a result of the cold. New Mexico output fell to 3.28 Bcfd and the lowest level in EIA records. Gas plant maintenance in Louisiana cut output -3.8% to 7.18 Bcfd and the lowest level since Nov-2010. There was also depletion from existing wells. The number of new wells drilled declines during the winter and increases once the warmer weather returns.
In 2012 analysts believed there were "several thousand" gas wells waiting for connection to a pipeline in their area. Those pockets of stranded wells are slowly being resolved and current estimates suggest there are just about 1,000 left to connect in Pennsylvania. That will provide a sharp boost to production when those connections are made. There are still a couple of thousand wells drilled but not completed because of the low gas prices. Eventually they will be completed and added to the system. It may take prices in the $4.50 range to stimulate producers to spend the money for completion.
Gas prices rose to $4.12 last week as the April futures contract expired. Apparently there were quite a few shorts expecting the normal spring decline in prices and got caught off guard by the late winter storms.
Nuclear plant outages totaled 21,800 megawatts or 22% of U.S. capacity. Plants typically schedule maintenance in the spring when electric demand is low. The normal arrival of spring was delayed slightly and the cold weather increased the demand on existing gas supplies for electricity generation.
The National Weather Service said the next 6-10 days would see below normal readings in the Northeast and above normal readings in the West. Winter is still present but fading in the Northeast.
WTI crude prices rose to $97.22 on Friday and the highest level in six weeks on better than expected growth in the USA. At least that is the reason given by the talking heads on the news programs. The final revision of the Q4 GDP showed the economy grew at a lackluster +0.38% compared to the prior estimate of +0.14%. That is hardly a reason for a victory celebration.
However, the EIA said oil demand in the U.S. rose by 6.2% in March to 18.9 mbpd. OPEC output declined -70,000 bpd to average 30.554 mbpd and the lowest level since Oct 2011. That was down from 30.624 mbpd in February. The official OPEC production target is 30.0 mbpd so they are still over quota. Much of the decline was due to Nigeria where violence and pipeline outages lowered output to the least in more than three years.
Nigerian oil theft has caused pipeline shutdowns, oil spills and fires. Shell was forced to declare force majeure on Bonny Light for part of March. Continuing unrest in Syria and Libya plus sectarian problems in Iraq are also slowing production. Kirkuk crude has been restrained by a dispute between the central Iraqi government and Kurdistan over payments. In Libya oil installations have become the focal point of protests. There are over 500 active militias operating in Libya today and there is no real central government. Saudi Arabia produced 9.23 Mbpd in March.
Iran exported 1.15 mbpd despite increased sanctions. India has refused to halt purchases from Iran and is actively trying to create a consortium of shippers to insure tanker loads of crude oil to India. China is still buying oil from Iran although the quantities are declining.
All the major indexes closed at or near new highs in Friday. The S&P-500 finally inched up to close at 1569 and just over the prior high close from 2007 at 1565. This will either energize the markets or it will be like a marathon runner crossing the finish line and collapse from exhaustion.
Historically the first week of April is weak followed by another surge the last two weeks of the month. May begins the decline into summer.
History should be a guide but not a promise. The markets had a great first quarter without any material bouts of profit taking. We are overdue. If we make it to May without any major decline I think the sell in may cycle this year could be ugly.
I would be cautious about new longs in the market until we see a dip.
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