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Natural gas drilling activity may continue to taper off but if
prices hold near current levels it is nearing the bottom.
In any case, we anticipate that the number of rigs targeting oil will
surpass gas rigs be fore the end of April. The great unknown is what
level of gas drilling is necessary to maintain production.
The dramatic increase in the number of of horizontal wells is a
structural change in the industry. A typical new horizontal well
produces far more than its vertical counterpart. However, the
production in these wells declines dramatically in some cases as much
as 80% in the first year. This makes production more difficult to
estimate from rig count. We are just beginning to have enough data.
we can not yet estimate with certainty the point at which rig count
will fall enough to bring supply and demand into balance and support
natural gas prices in the $4.00 - $5.00 range the evidence is that it
will come sometime this year. The market seems to agree with the
December futures price of natural gas on NYMEX near $5.00.
history is any guide lower drilling activity will cause the supply of
gas to fall below demand leading to a spike in prices. That will be
followed in a few months by a surge in drilling activity and eventually
and over-supply of gas. The over-supply will lead to a price collapse
and with falling prices lower drilling activity and eventually
production. Then the cycle will repeat. The length of these cycles
should range between 2-3 years.
for March 24, 2011
Light Sweet Crude
Oil NY Harbor
For the week of March 18, natural gas in storage was off 6
to the 5-year average withdrawal of 15 Bcf. That is a little bearish,
but we are in for colder than normal weather in the East Consuming
Region through mid-April. This resulted in 1,612
working gas in storage, which is only 25 Bcf (1.6%) above the 5-year
average and 14 Bcf (0.9%) lower than last year.
The rate of withdrawal this heating season is 325 Bcf greater than the
are above the 5-year average on a national basis the Eastern Consuming
Region is not. This
week storage in the Eastern Consuming Region was down 22 Bcf compared
the normal withdrawal of 23 Bcf. Storage at 675 Bcf is 85 Bcf (11.2%)
below last year and 68 Bcf
(9.2%) above the 5-year average. The East doesn't need as
much gas in storage because of additional local supply from new shale
West Consuming Region had an injection of one Bcf which is average for
this time of year. With 222 Bcf in storage the West is 63
(22.1%) lower than last year and 22 Bcf (8.9%) lower than the 5-year
There was a 15 Bcf injection in the producing region which is 8 Bcf
above the 5-average of 7 Bcf. With 715 Bcf in storage, the
producing region is 134 Bcf (23.1%) above last year and 115 Bcf
above the 5-year average of 600.
Overall storage levels are slightly above normal, but on a regional level
the producing Region is quite high while the Eastern and Western
Consuming Regions are below normal. If storage levels in the producing
region fall below the 5-year average we will take it as a clear bullish
signal for gas prices.
If Cheniere Energy, Freeport LNG and others are allowed to build LNG
export terminals, the exposure to international markets should lift the
price here in the U.S.
Friday, March 18, 2010