Why does US natural gas production continue to rise as prices fall?

(Reuters) – U.S. natural gas prices fell last week to a 30-month low, breaking below $2 per million British thermal units (mmBtu) for the second time this year, even as some producers cut drilling to stave off further convulsions. . .

Since the start of the year, US gas futures have collapsed about 50%, a record low for a quarter, due to rising production and mostly mild weather so far this winter, which has kept heating demand low and allowed utilities to leave more gas in storage than usual.

But there is little chance of stopping further production growth. Meanwhile, the amount of gas in US storage is about 21% higher than usual for this time of year, and that surplus will set up US inventories to reach record levels ahead of next winter’s heating season.

Major gas producers including Chesapeake Energy Corp (CHK.O) and Comstock Resources Inc (CRK.N) are cutting back on drilling. But gas from oil will continue to rise in the largest shale fields. And oil producers are not shrinking.

said Jacques Russo, managing director of research firm Clearview Energy Partners LLC. “It is unlikely that this production will decline given the current oil prices.”

The Permian Basin of Texas and New Mexico, the country’s largest shale field, has posted monthly oil production records this year, according to US Energy Information Administration (EIA) data. Gas from the Permian River has also risen to record levels every month this year.

So while US gas futures fell 50% in the first quarter of 2023, at $2.22 per million British thermal units, it’s not low enough to prevent production gains, analysts say.

“Gas prices are begging the market to cut supplies, amid lower US consumption and constrained LNG export options,” said Stephen Ellis, energy strategist at Morningstar Research Services LLC.

Production is still stuck

US gas production is still on track to reach 100.67 bcfd this year, up from 98.09 bcfd last year, according to the US government.

Projected US gas use, including exports, will decline to 107.3 bcfd this year from 107.4 bcfd last year due to projected declines in domestic consumption from residential, commercial, industrial and power generation customers.

This decline in utilization comes despite an expected 14% increase in US LNG exports now that the Freeport LNG export plant in Texas is back in production after an eight-month outage.

When operating at full capacity, Freeport LNG, which shut down after a fire in June 2022, consumes about 2% of all US gas supplies.

Despite lower gas prices, US rigs have 160 rigs seeking gas up 16% from a year ago, according to data from Baker Hughes Co (BKR.O).

Gas production at the Hinesville shale field in Arkansas, Louisiana and Texas where Chesapeake and Comstock are dumping rigs, is also on track to reach new highs in March and April, according to the Energy Information Administration.

Reporting by Scott DiSavino. Editing by Sandra Mahler

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