The fundamentals for natural gas may be aligning for a more bullish price outlook, but producers are taking their time responding. A report from IHS Markit in mid-May noted that Lower 48 U.S. gas production averaged just 70.2 billion cubic feet per day (Bcf/d) during April. This was the lowest mark in two months and 3.5% lower than the year-ago period, but still a bit higher than production tallies at the beginning of 2017. Production is lagging despite a higher rig count, strengthening the outlook for prices.
The biggest surprise from the IHS data are “sharp declines in Texas and Gulf of Mexico production, which we’ve not seen since September 2008, when hurricanes Gustave and Ike wreaked havoc on offshore platforms,” said Jack Weixel, vice president of analytics at PointLogic Energy, a unit of IHS Markit. Gulf producers are instead focusing on deeper offshore oil targets that have less associated gas production, according to the report.
Northeast producers are cautious currently in their approach to increasing supply from the region, and with nearly 23 Bcf/d to their credit, contribute about 33% of total U.S. Lower 48 production. The Southeast U.S. gas producing areas have remained flat.
Despite firming in natural gas prices overall, Weixel said, the market is slow to respond, and the same “dismal level of production persists for months on end.”
The commodities group at Société Générale (SocGen) said in a May 12 report on U.S. natural gas drivers that “the overarching market optics [storage/daily power loads] look normal to bearish, but the underlying fundamentals and near-term outlook look very bullish.”
The SocGen analysts summed up current drivers for the gas market: storage is trending at a “relatively high” level, power generation demand is showing weakness, production strategy hasn’t reverted to growth and exports are rising, the report said.
FERC’s recently announced Rover Pipeline drilling restrictions, along with warming weather, are also supporting prices. “The recent FERC restriction on Rover drilling [adds] further support to our view of slow production growth through first-quarter 2018, which should leave first-half 2018 very vulnerable to tightening, and subsequent price upside,” SocGen analysts added.
On the oil front, the SocGen group expects an OPEC target rollover, leading them to forecast WTI oil prices at $55 per barrel (bbl) for the second quarter of this year, $58/bbl by the third quarter, $60/bbl in the fourth, and $62.50/bbl in 2018.
Mexico exports are increasingly a key factor in gas demand. Between August 2016 and March of this year, net Mexico exports averaged 4 Bcf/d; in 2015, they averaged less than 3 Bcf/d, according to SocGen. The analysts expect Mexico exports to ramp to 5 Bcf/d by first-quarter 2018, but noted that downstream expansions are needed to provide ultimate full market access.
While production growth from the Northeast has been hampered by the Rover restrictions as well as other exit capacity concerns, the SocGen analysts said they are watching gas growth from the Permian and revitalized drilling in the Haynesville as “critical contributors” to their near-term growth outlook. They think that producers are cautious about price and infrastructure capacity, and therefore may be slow to ramp up production. This could allow for tightened fundamentals to linger, “supporting sustained upside price pressure through 2018.”