by Christine Buurma  7:01 PM CDT    March 17, 2015

(Bloomberg) -- Relentless U.S. production gains that caught many natural gas traders by surprise have triggered a 30 percent plunge in prices since November.

Bank of America Corp. says the sell off isn’t over and is telling clients to brace for the possibility of sub-$2 prices for the first time in three years. Gas output will climb to an all-time high of 78.39 billion cubic feet a day this year, an increase of 50 percent over 2005, led by shale reservoirs in Pennsylvania, Louisiana and Texas, government data show.

The number of gas rigs has tumbled to the lowest level since 1993, yet supply has risen steadily because of improved techniques for extracting the fuel. Natural gas for April delivery traded as low as $2.821 per million British thermal units on Wednesday in electronic trading on the New York Mercantile Exchange, down from $4.456 a year ago. Futures were last below $2 in April 2012 and haven’t traded there for more than a handful of days since 1999.

“Production has definitely surprised,” Francisco Blanch, head of global commodity research at Bank of America in New York, said in a March 10 phone interview. “We have $2.25 as our target for a normal summer, but we could see much lower prices with cool weather” that reduces utilities’ demand for natural gas.

Break Even

In part of the Marcellus reservoir in Pennsylvania, the nation’s most productive gas basin, the break-even price is 38 cents. Some producers in the nearby Utica shale can make money by selling gas at a loss because of profits earned from gas liquids that flow from the same wells, data compiled by Bloomberg New Energy Finance show.

U.S. gas output has climbed to a record every year since 2011, driven by gains at shale formations from the Marcellus and Utica to Haynesville in Louisiana, and Eagle Ford and Permian in Texas. Operators in those basins have used techniques such as drilling multiple wells from the same pad to cut costs and boost production. The Energy Information Administration has raised its estimate for 2015 gas production 7.8 percent from a year ago, according to the monthly Short-Term Energy Outlook.

Supply from the Marcellus may climb to 16.79 billion cubic feet a day in April, up 21 percent from a year earlier, the EIA, the Energy Department’s statistical arm, said March 9 in its monthly Drilling Productivity Report. Utica output may rise to 1.97 billion a day, more than doubling from April 2014.

Price Forecast

“The technology keeps getting better,” Blanch said. “There also have been cost savings across the board in a deflationary economy.” The bank said in a Feb. 20 report that it was cutting its forecast for average 2015 gas prices to $2.85 per million Btu from $3.90.

Gas stockpiles totaled 1.512 trillion cubic feet as of March 6, up 47 percent from a year earlier, the EIA said. Supplies were 13 percent below the five-year average, narrowing from a record 55 percent at the end of last winter.

“We’re under supplied relative to the historical average, but that’s not a meaningful number, given the growth in lower 48 gas production,” said Tim Rezvan, an analyst at Sterne Agee Group Inc. in New York.

The drop in gas prices would mean a boost in demand from utilities and power generators, which are increasingly reliant on gas for electricity production as environmental regulations force coal-fired plants to shut. Demand from plants switching to gas from coal totals about 6.4 billion cubic feet a day, the most in two years, according to Bank of America.

Power Plants

Natural gas prices will drop about 8.9 percent to average $2.60 per million Btu this summer, Deutsche Bank AG said, low enough to spur demand from power plants that might otherwise use cheap Appalachian coal, which is trading at about $2.50 per million Btu before delivery costs. Gas consumption by power plants will rise 8.1 percent this year to 24.13 billion cubic feet a day, the most since 2012, the EIA said March 10.

“Prices need to decline to incentivize demand and keep storage from reaching a surplus once again,” Michael Hsueh, an analyst for Deutsche Bank in London, said by phone March 10.

The likelihood of a hotter-than-normal summer this year is less than 50 percent, according to Commodity Weather Group LLC, which predicts cooler-than-normal weather in parts of the eastern and central U.S. in April and May. About 32 percent of U.S. gas demand comes from power generators.

“We could absolutely see” gas below $2 gas this summer, Sterne Agee’s Rezvan said. Such a price “would cause operators to shut in wells because they can’t recover transportation costs. It would be an ugly situation for the market.”

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