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U.S. gas production shows tentative signs of upturn: Kemp
November 1, 2016 / 1:11 PM / a year ago

U.S. gas production shows tentative signs of upturn: Kemp

LONDON (Reuters) - U.S. natural gas production may be stabilising or even starting to rise as the boost to oil and gas prices in recent months stimulates an increase in new drilling.

Marketed dry gas production amounted to 2,239 billion cubic feet in August, down from 2,302 bcf in August 2015, according to the U.S. Energy Information Administration (tmsnrt.rs/2e9e05u).

Gas production has been down year on year by an increasingly large percentage since March as the effect of low prices and a reduction in drilling filters through.

Output in July was down by more than 4 percent compared with the same month a year earlier, according to EIA survey data.

But production bucked the trend in August and was down by just 2.7 percent from a year earlier (tmsnrt.rs/2e9k1z2).

Extrapolating a trend from a single month’s data is risky especially when the series has a high level of inter-month volatility.

However, the reported increase in gas production is consistent with separate data showing a large increase in drilling over the last five months.

The number of rigs drilling for oil and gas has risen by 153 or 38 percent since the end of May, according to oilfield services company Baker Hughes (tmsnrt.rs/2e9h1TF).

Most of the extra rigs are nominally targeting primarily oil-bearing formations (125) with a much smaller increase in the number reported to be drilling mainly for gas (27).

The increase in oil drilling also began earlier, from the start of June, while the upturn in gas drilling began in earnest only at the end of August (“U.S. oil and gas producers stir from hibernation”, Reuters, Oct. 24).

But most oil wells will also produce substantial quantities of associated gas so the increase in oil drilling will push up gas output.

And the big increase in gas-focused drilling during September and October should result in further production gains during the remaining months of the year.

Output needs to rise to meet a structural increase in demand from the growing number of combined cycle natural gas-fired power plants built across the country.

Gas consumption rose by more than 0.5 percent in the first eight months of 2016 compared with the same period a year earlier despite a record warm winter.

Post-winter consumption rose by more than 6.5 percent between April and August compared with the same period in 2015 (“New wave of power plants is fuelling U.S. gas demand”, Reuters, Oct. 4).

Futures prices rose by more than 40 percent between late February and early October to accelerate supply and slow down the rate of demand growth.

Prices have since pulled back as the market reacts to an unusually slow start to the heating season and signs of resumed drilling (“U.S. natural gas prices caught in the crossfire”, Reuters, Oct. 28).

Traders are hunting for a combination of spot price and forward structure that will keep power burn high in the short term while curbing demand further forward and encouraging new drilling to bring on more supply.

(John Kemp is a Reuters market analyst. The views expressed are his own)

Editing by David Evans

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