EIA Data Points to a Bullish Natural Gas Market


"Production should be falling. It is. Decline should be fairly steep. It is."

Last week the EIA released its 'EIA-914' report on natural gas production in the U.S. for the month of July. Production decreased 0.7 bcf/day from the previous month—a relatively bullish report. It was the fifth month in a row that production declined, reflecting the fact that the U.S. natural gas drilling rig count has fallen by over half from the highs last fall.

After over 24 months of volumes slowly moving upward the 'trend' in natural gas production the last five months has reversed and turned downward.

The lack of natural gas drilling activity should cause production to fall further as we head into winter, a period when heating demands increase natural gas demand by ~50%. Historically, when we have seen natural gas production trend downward it takes nearly 18 months for the trend to reverse after drilling activity recovers. Natural gas drilling activity has stabilized but shows no sign of recovering. The production trend is clearly downward for the foreseeable future.

Tudor Pickering Holt, an energy consulting group, made the following comments on their recent natural gas supply study and on the recent EIA-914 report:

". . .we have gotten bullish on 2010 gas following our US Natural Gas Supply Study published in late August. With our neck out on the limb, we are watching the data points and anecdotes quite closely (understatement of the century).

Bottom line: Production should be falling. It is. Decline should be fairly steep. It is. Month-to-month and week-to-week data points will wear you out but they are generally confirming our thesis. Our conviction level is higher today than it was [a couple of months ago]. . .[this data] raises our conviction level on 2010 gas market tightness and $7.50/mcf price forecast. . .[note the current natural gas price is roughly $4.45/mcf]. . ."

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