Has the supply boom come to an end?

Natural Gas Report
By Casey Whelan | May 15, 2013

April 29—Natural gas prices have dropped over the past several years as the market increasingly recognized that natural gas supply was growing at a much more rapid pace than demand. In 2008, prices were above $8 per MMBtu and the “experts” thought prices would continue to go up, but shale drilling dramatically changed market expectations. Not surprisingly, as prices dropped, drilling activity directed at natural gas dropped as well. However, production continued to grow in spite of diminished drilling for natural gas. That may be changing.

As the chart shows, monthly production numbers are certainly flattening and may be starting to drop. This may be the beginning of a sustained drop in natural gas production or perhaps just a lull in production increases. At this time, the answer isn’t known for certain. After all, production dropped in the first quarter of 2012 but then rebounded to hit historic high levels. Certainly the answer matters to natural gas consumers since natural gas prices are highly responsive to natural gas supply. If natural gas production is dropping, prices are likely to be well above $5 per MMBtu as the market recognizes movement into a supply short position. If, on the other hand, production remains steady or increases, prices likely will remain at $4 per MMBtu or lower. For consumers who believe the downtrend will continue, it may be a good time to “get long”. For those who believe the downtrend is transitory, maintaining a short position is the best strategy.