Energy Economist: News, Natural Gas Storage -  March 25, 2011
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Natural Gas

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.
While 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.

If 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.
NYMEX Prices for March 24, 2011
NYMEX Light Sweet Crude -0.15
$105.60
ICE Brent +0.17
$115.72
RBOB Gasoline NY Harbor +0.0235
$3.0448
Heating Oil NY Harbor +0.0070
$3.0620
NYMEX Natural Gas -0.091
$4.244



Storage

For the week of March 18, natural gas in storage was off 6 Bcf compared 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 Bcf of 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 5-year average.

We 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 to 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 production.


The 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 Bcf (22.1%) lower than last year and 22 Bcf (8.9%) lower than the 5-year average.

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 (19.2%) 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.







Data for the week ending Friday, March 18, 2010
You can view the most current data on natural gas storage in greater detail at
Weekly Storage Report .
The first three articles in the gas background series are at
Natural Gas Background Series (1) Consumption

Natural Gas Background Series (2) Production

Natural Gas Background Series (3) Prices & Storage
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Copyright © 2011
James L. Williams

WTRG Economics

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