Thursday, April 19, 2012

Natural gas production has stabilized, but will it start declining?

As natural gas prices continue to collapse (nearing $1.9), we are starting to hear more talk about production cuts.

Natural gas nearby futures contract price

But the market remains skeptical.
WP: “Companies can talk all they want about reducing production, but until we start seeing a difference, prices are going to fall,” independent analyst and trader Stephen Schork said.
Part of this skepticism is driven by the inventory levels which are still extremely high relative to historical ranges.

With massive amounts of new gas coming out of the Marcellus formation, are companies actually trying to cut production? The chart below shows that production, though still at historically record levels, has indeed leveled off.
EIA: After a long period of steady growth, U.S. daily dry gas production growth leveled off during the first three months of 2012, averaging 63.8 Bcfd through March 31, a level almost 9% above the same period in 2011

But in order for gas prices to stabilize, the market is looking for production to start declining materially. In an environment where production quotas are not permitted by law (the way that OPEC does with crude production), each firm would need to cut output on its own in order to stem the flow of gas. It's a tough decision because the lower the price the more companies want to pump to generate their target revenue - until of course the margins are no longer there and sales begin to generate losses.
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