Natural gas prices – positive and negative news last week (Part 4 of 7)

(Continued from Part 3)

The EIA’s (U.S. Energy Information Administration) January STEO (Short-Term Energy Outlook) projects total dry natural gas production to grow by ~3.8% to 72.80 billion cubic feet, or Bcf, in 2015. It projects total dry natural gas production to grow by ~2.2% to 74.38 Bcf in 2016. According to the EIA’s estimates, dry natural gas production was 70.17 Bcf in 2014.

High supply levels are bearish for natural gas prices. Weak prices hurt the margins of companies that produce gas—like Chesapeake Energy (CHK), Cabot Oil and Gas (COG), Devon Energy (DVN), and QEP Resources (QEP). Since most of these companies are part of the Energy Select Sector SPDR ETF (XLE), the energy price outlook will likely affect the ETF as well. All of these companies make up ~4% of XLE.

According to the EIA, dry gas production in November 2014—the most recent month that EIA data is available—was ~72.8 billion cubic feet per day, or Bcf/d. This is 6.2% higher than it was in November 2013.

Also, Bentek Energy reported that dry natural gas production averaged 71.7 Bcf/d since November 1. This is ~6.3 Bcf/d more than production for the same period last winter.

The cold weather forecasted for the next couple of days might push the inventories below the five-year average. However, it’s important to note that the EIA predicts that dry natural gas production will average 72.7 Bcf/d for February–March. This is 5 Bcf/d higher than the same period in 2014. This could help moderate prices to an extent.

Dry natural gas is the natural gas that remains after liquids—like propane and butane—have been removed from the marketed natural gas. Dry natural gas is also known as “consumer-grade natural gas.”

The EIA continues to be bullish about natural gas production in 2015. Read Must-know: Why the EIA is bullish about natural gas production to learn more.

Strengthening inventory combined with continued production growth sets a grim scenario for natural gas prices. The EIA forecasted that monthly average prices will remain below $4 per MMBtu (British thermal units in millions) levels through most of 2015 and 2016.

Natural gas inventories are governed by natural gas production and consumption trends. In the next part of this series, we’ll discuss if strong consumption trends could help push prices upwards.

Continue to Part 5

Browse this series on Market Realist:

• Part 1 - EIA’s natural gas inventory report is crucial for energy investors
• Part 2 - Natural gas inventories surpassed the 5-year average
• Part 3 - Why cold weather forecasts support natural gas prices