Natural gas may need epic price collapse

The Natural Gas Rout

There is no doubt in anyone’s mind that the natural gas market has taken a beating. But is the rout almost over or has it just begun? In what could turn out to be a historic swoon, it is clear that at some point something has got to give. The natural gas market is running out of space to put supply and the system will soon get clogged so it is becoming more obvious that the only thing that can fix this market is perhaps an epic price collapse. We have to get gas out of the system and based upon current production rates, it is clear that producers are not getting the message. Some producers of course do not care as the price of oil makes it possible to get rid of the gas for nothing. Yet wondering where this market will be in a few weeks just boggles the imagination.

The glut comes as the fracking revolution just continues to exceed supply expectations. The AP reports that, “Natural gas wells using the drilling method known as hydraulic fracturing are producing at a much higher rate than traditional wells, according to the first look at production figures from nine active wells in the Utica Shale formation in eastern Ohio. Figures reported Monday by Oklahoma City-based Chesapeake Energy Corp. show five wells in eastern Ohio producing 2.6 billion cubic feet of natural gas in 2011. The other four wells produced hundreds of barrels of oil but are not in natural gas production yet, according to Chesapeake. The report, which Chesapeake provided to the Ohio Department of Natural Resources, shows one well in Harrison County producing 1.5 billion cubic feet of natural gas, or 2% of the state's entire natural gas production. Put another way, that well has 300 times more in daily production than the average well drilled vertically into the ground," said Rick Simmers, chief of ODNR's Division of Oil and Gas Resources Management.”

Reuters reported that Baker Hughes data on Friday showed the gas-directed rig count rose by six to 658 after hitting a 10-year low of 652 the prior week. It was the first gain in the gas rig count in 12 weeks. The steady drop in dry gas drilling this year, the gas count is still down nearly 30% since peaking at 936 in mid-October, had stirred expectations that low gas prices would finally force producers to curb gas output and tighten supplies. But the drop has yet to be reflected in pipeline flows, which are still estimated to be at or near record high levels, primarily due to rising output from shale. U.S. Energy Information Administration production data last week offered little hope for the bulls, with January gross gas output climbing to a record of 72.85 billion cubic feet per day, eclipsing the previous peak of 72.68 bcfd in November. The slight drop the agency reported for December, the first measurable decline since well freeze offs curbed output in January and February 2011, had raised expectations that producers might finally be curtailing output.

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