Accelerating shale gas declines show supply held hostage by oil

CHRISTINE BUURMA and NAUREEN S. MALIK

NEW YORK (Bloomberg) -- After four years of record supply, natural gas output is showing signs of weakness as producers pull back amid tumbling oil prices.

Gas production from the seven largest shale basins will fall 0.6% to 45.1 Bcfd in August from a month earlier, the biggest drop since March 2014, the U.S. Energy Information Administration (EIA) said Monday in its monthly Drilling Productivity report. EIA estimates have shown supply declines since June.

The government’s forecasts signal that the 51% collapse in crude oil prices since June 20, 2014, is reverberating in the natural gas market. As drillers shut wells in liquids-rich deposits from North Dakota to Texas, they’re also curtailing gas output from those reservoirs. That may prevent further price declines for gas, which has slid 37% since oil’s plunge.

“Gas is being held captive by oil,” Aaron Calder, senior market analyst at Gelber & Associates in Houston, said by phone Monday. “Natural gas prices were artificially kept low by high oil prices.”

Natural gas for August delivery rose 9.4 cents, or 3.4%, to $2.864 per million British thermal units Monday on the New York Mercantile Exchange, a four-week high. West Texas Intermediate crude fell 1% to $52.20/bbl.

The estimated drop in gas output was led by the Eagle Ford shale, the biggest oil reservoir in the U.S., EIA data show. Gas supply there will slide 1.7% in August, while output from the Utica deposit in the Northeast, where propane and ethane help to subsidize gas drilling, is poised to climb 0.8%.

Oil Drilling

“We had people drilling for oil in the Eagle Ford and they had all this associated gas and were putting it on the market,” Calder said. “In 2012 prices were too low to sustain natural gas economics, but we were still getting production from those oil wells. We are getting less gas on the market because we have less oil.”

Marketed gas production will expand at a slower pace in 2015, rising 5.7% to a record 78.97 Bcfd, compared with 6.2% last year, government data show. That’s good news for gas bulls, whose ranks have thinned this year as prices have slid. Money managers have been net-short in four benchmark gas contracts since January.

Meantime, gas deliveries to electricity generators are up 15% from a year ago, according to LCI Energy Insight in El Paso, Texas.

Demand from the power industry, the fuel’s biggest customer, may jump 13% this year in response to low prices, according to the EIA. A hotter-than-normal summer would increase fuel consumption to run air conditioners.

Hotter Weather

“Production is not showing up and that is partially because the prices are so low,” Derek Salvino, V.P. of market research at Tradition Energy in Stamford, Conn., said by phone Monday. “We see some heat in the forecast.”

MDA Weather Services predicts above-normal temperatures in parts of the southern and central U.S. through July 27.

Temperatures may be above-average in the Southeast and Texas over the next two weeks, “which should support stronger demand and limit injections,” Morgan Stanley analysts including Adam Longson in New York said in a note to clients Monday. “Supply growth should continue to disappoint.”