Gas -51% Below Five Year Average

Jim Brown
 
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The EIA is starting to raise the alarm on natural gas supplies as another series of winter storms takes aim at the Midwest and Northeast.

The EIA said for the week ended on March 21st that gas in underground storage declined -57 Bcf to 896 Bcf and -50.8% below the five year average and -44.6% below the bottom of the five-year average range. This is the lowest level in 11 years.


Meanwhile active rigs drilling for natural gas fell to another 19 year low at 318. The shift to liquids drilling is continuing to see rigs head to the oil and wet gas fields. Encana has production in more than 30 different fields and they said they were going to spend their capex funds for 2014 in the top five liquids rich fields. Encana is one of the largest gas producers in North America and they are getting out of the gas business.

Gas rigs at 19 year low, gas in storage at 11 year low. The number of active oil rigs is the most since Baker Hughes started separating oil and gas rigs in the rig count in 1989.


The U.S. was thought to be in decline in 2007 for natural gas. Peak gas for North America had already arrived but technology saved the day. The advent of horizontal shale gas drilling was a boom for the energy sector and the economy. Since 2006 shale gas production from the eight major fields in the U.S. has increased more than 30 Bcf per day and it is still rising only at a slower pace. The majority of the gains are coming from the Marcellus and the Eagle Ford. The Haynesville Shale, Barnett and Fayetteville are either flat or declining today. They have already peaked after coming online just a few short years ago. As they decline the Marcellus and Eagle Ford will be called on to produce even faster to make up for the declines in the other fields.


The challenge of course is pricing. The Eagle Ford produces gas along with the oil so price is not as much of a concern. If you produce oil the gas comes with it as a bonus. For the Marcellus the price is more important. It will take higher gas prices and the promise of higher prices in the future to bring the production companies back to the Marcellus.

At the current price around $4.40 per Mcf some wells cannot be drilled profitably. Producers are not into spending millions of dollars per well just to break even. They can drill a well in the Eagle Ford in Texas or the Wattenberg in Colorado and get better than 100% returns. The wells are easier and there is no shortage of drilling locations. Regulations and permitting are significantly easier.

I predict we are going to see a continued decline in gas rigs until the price of gas rises over $5 and production falls even further below demand. I pointed out last week that production in 2013 averaged 71.16 Bcf per day and demand averaged 71.33 Bcf per day. As demand continues to grow and production continues to slip the price will rise and we will start to see headlines about the "gas shortage" in the USA.

Oil and gas production is cyclical. If you look at a chart of rig utilization over the last 40 years it looks like a roller coaster with peaks and valleys every 4-6 years. We are currently in an oil peak and gas valley. As situations around the world in Iraq, Syria, Egypt, Nigeria, Libya, Venezuela and Brazil clear up and oil begins to flow again the price will come down and the cycle will repeat.

Lastly, there has already been about 12 Bcf per day of LNG facilities permitted. There are more than 20 other applications pending for roughly another 40 Bcf. With our current demand and production roughly equal where is that gas coming from? Once Cheniere Energy begins taking large amounts of gas out of the system in 2015 and beyond the supply demand equation is going to make another abrupt change. If they are selling it to Asia at the going price today of roughly $18 per Mcf they can afford to pay more to get it and that will push prices higher and promote more drilling.

Market

The Nasdaq and the Russell 2000 were the leaders to the downside last week while the Dow managed to close the week with a minor gain.

The last week of March is seasonally negative about 71% of the time and it played out as expected. The rumblings of a potential negotiated settlement over Ukraine has lifted the S&P futures to a +7 point gain late Sunday evening. Whether this will carry over into Monday is unknown. I do expect a market bounce this week.

Jim Brown

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