Thursday, August 25, 2016

Fitch: falling associated gas volumes steadying US gas prices


Associated gas production at oil-focused U.S. shale plays has declined in line with lower spending, providing modest support to U.S. natural gas prices, according to Fitch Ratings. The impact of associated gas production, which is natural gas produced alongside oil, could exacerbate any divergence in price trends if either oil or gas prices rebound significantly faster than the other.

Natural gas volumes are down across a number of key liquids-rich shale basins. A review of Energy Information Administration data suggests that associated gas production is down 3.1 Bcf/d relative to peak production levels, including the Eagle Ford (-1.6 Bcf/d), Niobrara ( -1.1 Bcf/d), Permian (-218 mmcf/d), and the Bakken (-162 mmcf/d). On an overall basis, U.S. dry gas production has stabilized at approximately 73 Bcf/d, a year-over-year decline of approximately 1 percent. This contrasts with U.S. dry gas production growth in the 5 to 6 percent range seen as recently as 2014-2015.

Less associated gas, lower activity levels in key dry gas basins and improved demand from hot summer weather have helped gas prices recover from rock bottom levels seen earlier this winter when gas prices briefly dipped below $1.50/mcf.

Unlike the Marcellus or Haynesville, where drilling decisions tend to be driven by dry gas economics, drilling decisions in associated gas plays tend to be more driven by oil/natural gas liquids (NGLs) pricing. As a result, a scenario where natural gas prices remain depressed but oil or NGLs rebound sharply would tend to encourage overproduction of gas and weigh on prices. Conversely, a lagged recovery in oil/NGLs pricing would tend to keep activity in the shales depressed, further reducing associated gas production and supporting gas prices, all else equal.

We believe that the US natural gas market is more reliant on improved demand fundamentals than the oil market, and may therefore take longer to see a reasonable price recovery. Continued drilling efficiency gains and limited export opportunities are likely to cap gas price gains in the near to medium term. Our current base case price deck for Henry Hub natural gas is $2.35/mcf in 2016, $2.75/mcf in 2017, $3.00/mcf in 2018, and $3.25/mcf in the long term.

In addition to supportive weather, current demand drivers include additional coal to gas switching; a further ramp up in industrial demand for natural gas, including the large slate of greenfield chemicals capacity on the gulf coast and elsewhere; export demand to Mexico; and modest liquified natural gas export demand.

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