While the (debatable) resilience of U.S. oil production has attracted a lot of attention, we’ve noticed a much more interesting story: the lack of growth, or even sequential decline, in U.S. natural gas output. If you’ve wondered why U.S. natural gas prices have shrugged off the broader commodity price decline, look to the lack of production growth despite expanded infrastructure (though a near-zero beta to China growth doesn’t hurt, either).
Earlier this year, we forecast slowing natural gas production as many analysts were citing 2012’s strong performance as evidence that output could grow at seemingly any rig level (see “This Is Not 2012 – U.S. Oil and Gas Supply Will Respond More Strongly to Falling Rig Counts”). While large maintenance programs have hindered production this summer, natural gas production associated with petroleum seems to be making a materially lower contribution to overall natural gas output. In addition, early signs suggest that efficiency gains are also slowing in natural gas plays. While we expect a production uptick this winter as northeast pipeline expansions come online, complacent short-sellers will likely be surprised if output doesn’t hit new highs by mid-November. We think this tilts the risk for natural gas prices to the upside.
This brings us back to the oil story: Although we see more room for efficiency gains in the petroleum production zones, as well as a rotation away from natural gas and toward more petroleum plays (at least in Texas), we believe oil production will flatline or decline slightly, just like it has with natural gas. Indeed, for the second month in a row, the Energy Information Agency (EIA) Petroleum Supply Monthly reported a decline in onshore Lower-48 petroleum output for May. The EIA Short Term Energy Outlook also forecast sharp production declines in petroleum output in the third quarter. These bold estimates make us wonder if the EIA’s next monthly report will show additional, but more meaningful, declines. That would change the narrative.