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US output surge may revive natgas glut

28 Jun 2017 21:03 (+01:00 GMT)
US output surge may revive natgas glut

Houston, 28 June (Argus) — The rebound in US natural gas prices above $3/mmBtu could be derailed this summer by a looming supply glut.

Producers pared development of gas-rich fields last year when prices collapsed to a 17-year low below $1.65/mmBtu in February 2016. This followed a boom in supplies and a mild winter.

But those companies have been accelerating drilling in 2017 to capture higher profits and meet demand for low-cost gas in the US and abroad. Demand since last year's lows has also increased as electric utilities relied more heavily on less-expensive gas to meet customer needs. This has some analysts and market participants bracing for a flood of fresh supplies.

"I do not think we have a glut" in the US market, said David Pursell, managing director of the energy investment bank Tudor Pickering Holt. "But I think we have one coming."

International markets also drew more heavily on US supplies this year. New pipelines have connected gas in Texas to Mexico and the startup of Cheniere Energy's Sabine Pass export terminal on the Gulf coast has opened overseas markets to plentiful US supplies.

Rising demand and falling supply have paved the way to higher prices, erasing the storied US supply glut. Prompt-month prices — which crossed the $3/mmBtu threshold in September 2016 for the first time in more than a year and climbed as high as $3.93/mmBtu on 28 December — settled yesterday at $3.037/mmBtu. That $3/mmBtu price point is lucrative enough to support more drilling and to curb demand from the power sector, creating the potential for the pendulum of supply to swing in the other direction.

A ramp up in gas drilling in the Marcellus and Utica shales, and new pipeline infrastructure in the northeast promises to push more gas into the US market. Oil drilling in the Permian basin of west Texas and southeastern New Mexico, an area rich with associated gas, should also boost production. The US gas rig count, an indicator of where production is headed, was 183 last week, while the oil rig count was up to 758, according to Baker Hughes. Both counts were more than double year-earlier levels.

Additional output from those fields and other gas-rich formations could lift 2017 US gas output by an estimated 3 Bcf/d (85mn m³) in 2018, Pursell said. That is enough gas to offset the 700mn cf/d increase this year in gas pipeline exports to Mexico and the 1.5 Bcf rise in gas intake at the Sabine Pass export terminal in Louisiana, two key sources of support for US gas prices.

The forthcoming wave of production could still be deterred if lower oil prices stem new drilling, or if regulatory delays stall the completion of new infrastructure in the northeast. Oil prices are trading near 10-month lows, which could prompt some producers to rein in drilling in the Permian. Already there are some signs that lower oil prices are slowing activity in Texas and New Mexico, according to a survey released by the Federal Reserve Bank of Dallas. In addition, federal regulators have halted new construction on the 3.25 Bcf/d Rover pipeline, a project designed to carry Marcellus gas to the US midcontinent and Canada.

Extreme cold could also absorb the excess supply. The US gas market is coming off back-to-back mild winters and a return even to more seasonal winter weather could significantly increase demand and bleed down inventories.

"Mother nature is still the dictator in the US gas market," said Kyle Cooper, a consultant for the brokerage Ion Energy.