US reports biggest drop in shale gas supply since March 2014 amid weak oil

By CHRISTINE BUURMA and NAUREEN S. MALIK
Bloomberg

After four years of record supply, America’s natural gas output is showing signs of weakness as producers retreat amid tumbling oil prices.

Gas production from the seven largest US shale basins will fall 0.6% to 45.1 billion cubic feet/day in August from a month earlier, the biggest drop since March 2014, the US Energy Information Administration said Monday in its monthly Drilling Productivity report. EIA estimates have shown supply declines since June.

The government’s forecasts signal the collapse in crude oil prices, which have plunged by about half over the past year, 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 almost a third over the same period.

“Gas is being held captive by oil,” said Aaron Calder, senior market analyst at Gelber & Associates in Houston.

Natural gas for August delivery rose 4.3 cents, or 1.5%, to $2.907/MMBtu at 9:25 a.m. on the New York Mercantile Exchange after reaching $2.934, the highest intraday price since June 17. US benchmark West Texas Intermediate crude fell 0.9% to $51.77/bbl.

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

Gas Bulls

Marketed gas production will expand at a slower pace in 2015, rising 5.7% to a record 78.97 billion cubic feet/day, 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.

“Production is not showing up and that is partially because the prices are so low,” said Derek Salvino, vice president of market research at Tradition Energy in Stamford, Connecticut. “We see some heat in the forecast.”

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