Stunted growth

Published at 16:03 24 Apr 2017 by . Last edited 17:05 24 Apr 2017.

The last hurrah of winter, seen mid-March, has given way to what looks likely to be a predominantly warm spring. With residential and commercial (Rescom) consumption falling seasonally, demand is taking a backseat to supply considerations, specifically focused on some underwhelming production numbers that are helping keep prices supported.

In particular, Henry Hub prices took some support from production levels that dipped to 70 bcf/d in the first week of April before recovering a bit towards the middle of the month.

Drilling activity in gas is still ticking upwards, with the gas rig count in early April up by 27 (20%) since the start of the year. While this is a much smaller number than the growth in oil rigs of 154 (29%), it is still a steady rise. In something of an unexpected twist, the biggest gains are not in the Northeast but in the southern producing regions. The Haynesville rig count is up by nine rigs (32%) and Oklahoma’s Arkoma Woodford has added six rigs (150%) so far this year.

In comparison, drilling activity in the Northeast is up by only six rigs (10%). The region still suffers from a shortage of mid-stream capacity, and Northeast production could be further constrained, later in the year, by FERC’s current difficulties in approving new pipeline projects.

All is not lost for Northeast production, however. Rig productivity continues to increase at a rate of over 1% m/m in the region. Furthermore, in the Marcellus, new well rig productivity is some 18% higher y/y, and the Northeast remains one of the few regions where gas production is still up y/y, despite the limited pick-up in rig counts.

The southern producing regions are showing signs that gas production will eventually turn the corner and rise, so the question seems to be more about when, and less about if, overall US production will grow. Still, given the ramp-up in production levels so far in Q2 17 has been even slower than our already cautious expectations, we have reduced our outlook for 2017 production from last month—growth is now at just 0.12 bcf/d. 

Another big theme over the coming quarters will be exports from the south, both by pipelines to Mexico and by LNG through the three trains now operating at Sabine Pass. US export volumes have risen in line with the continuing expansion of export pipeline capacity to Mexico. Already this year, some 2.4 bcf/d of additional cross-border pipeline capacity has been added, and pipeline data for March suggests that export flows have grown y/y by around 0.5–0.6 bcf/d to 4 bcf/d. The big question that remains is how much take-away capacity and demand sits on the other side of the border in Mexico. We expect that US exports to Mexico in 2017 will grow by 0.73 bcf/d and then increase by a larger 1.24 bcf/d in 2018.  

We have raised our 2017 price forecasts slightly relative to last month, with Q2 17 and Q3 17 expected to average 3.0 $/mmbtu, one fuel switch trigger higher than the previous forecasts of an average of 2.85 $/mmbtu. The revision reflects our expectations that even less gas will be available for power (bullish) and the fact that coal prices are lower (bearish). The biggest risks to these numbers come from continuing slow production and another hot summer—either could push prices up toward 3.3 $/mmbtu.

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