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Sep 28, 2016

Natural-Gas ‘Pipe Dream’ Won’t Cut Glut Weighing on U.S. Price

Published: Feb 10, 2010

By Joe Carroll

Feb. 10 (Bloomberg) -- U.S. natural-gas production is unexpectedly rising even as energy companies halt drilling at the fastest pace in more than two decades because newly found fields are gushing more fuel than previous discoveries.

The price of gas, the worst-performing U.S. energy futures contract of 2009, is on the verge of further declines when colder-than-normal weather and blizzards that have propped up demand from Chicago to Baltimore come to an end, said Porter Bennett, chief executive officer of Bentek Energy LLC, which tracks North American gas output and shipments.

Figures compiled by regulators in Texas and Wyoming, the biggest U.S. gas sources, are overstating the drain on supply from rigs idled by producers such as Chevron Corp. in response to low prices last year, said Corey Rhoden of HPDI LLC, an Austin, Texas, firm that monitors state-by-state gas output. Executives at Chesapeake Energy Corp. and hedge-fund manager Moncrief Willingham Energy Advisers LP last week cited state- level data in predicting an impending supply crunch.

“A massive collapse in the gas supply is a pipe dream,” said Subash Chandra, a managing director who follows the energy industry at Jefferies & Co. in New York. “Everything we can measure is telling us that gas production is not falling.”

U.S. wells pumped 60.577 billion cubic feet of gas a day in November, the highest for that month since 1973, the Energy Department said in a Jan. 29 report. The figure represented a 208 million-cubic-foot daily gain from October, or enough to supply more than one-third of the households in Pennsylvania.

Production has continued to rise despite last year’s 44 percent decline in the number of rigs drilling for gas in the U.S., the steepest drop since at least 1988, according to figures compiled by Baker Hughes Inc. The Energy Department is scheduled to disclose December gas output on Feb. 26.

Bearish Scenario

“Prices are lining up to tank,” Bennett said in an interview from Bentek’s headquarters in Evergreen, Colorado.

Bennett correctly predicted November gas output would be higher than October and September after the conclusion of pipeline repairs and freezing weather that forced some wells to temporarily shut.

The best that gas bulls can hope for is an extended period of cold weather that whittles away at gas held in underground storage caverns and aquifers, Bennett said. In that case, gas may trade for $5 to $6 per million British thermal units through the U.S. spring and summer. Otherwise, the supply glut will rise and prices will tumble, he said.

The production trend described in federal reports has drawn criticism from energy executives such as Chesapeake Senior Vice President Jeffrey Mobley and Moncrief Willingham co-founder B.J. Willingham, who said last week that the state-level data probably is more accurate.

Texas, Wyoming

State regulators have more at stake because of their dependence on energy taxes and royalties linked to gas volumes, Willingham said in a Feb. 2 interview in Houston.

In Texas, which accounts for 30 percent of U.S. domestic gas, the state’s Railroad Commission pegged November’s output decline at 16 percent from a year earlier, more than twice the 6.6 reduction tracked by the Energy Department in Washington.

For Wyoming, the No. 2 gas state, the Oil and Gas Conservation Commission said output rose 1.5 percent, less than the 4.2 percent increase described in last month’s federal report. Wyoming pumps 11 percent of the nation’s domestic gas.

HPDI’s Rhoden said state-level collection and distribution of gas-production data often lags actual output by several months, depending on the jurisdiction. In Texas, it can take 18 months after the start of production at a well before the Railroad Commission assigns it a tracking number and begins including that gas in overall output figures, he said.

No ‘Nose Dive’

“We’re still gaining production even though prices went to nightmare levels for the producers last year,” said Tom Doll, supervisor of Wyoming’s oil and gas commission and former manager of Williams Cos.’ gas wells in the state. “Production hasn’t taken a nose dive like I thought it would.”

Willingham, whose HedgEnergy fund returned 37 percent to investors in 2009 for its best year on record, estimates gas will reach or exceed $6.50 per million British thermal units before the end of the Northern Hemisphere winter. That would represent a 21 percent premium to yesterday’s closing price of $5.29 on the New York Mercantile Exchange.

Mobley, who oversees Oklahoma City-based Chesapeake’s research and investor-relations units, told investors on a Feb. 4 conference call that he expects the Energy Department to revise its output number lower in subsequent reports.

“I think there is growing evidence that there are problems with the survey method in calculating supply,” said Mobley, a former Raymond James & Associates analyst. “Over time, you’d probably see their data revisable.”

Jefferies’ Chandra sees no reason to believe gas output has fallen off a cliff. The number of rigs drilling wells ceased to be a reliable indicator of supply years ago, he said.

“I’m kind of mystified that that’s being seriously discussed,” Chandra said. “The correlation between the rig count and gas production is iffy at best.”

To contact the reporter on this story: Joe Carroll in Chicago at

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