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Energy Market Update: May 21, 2020

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After last month’s severe drop in oil prices, oil producers are scrambling to cut production and stem their losses. Is the natural gas market following suit?
 
Direct Energy Business Strategist Tim Bigler connects the dots in this week’s Energy Market Update.

 


When oil went negative last month, analysts discussed whether reduced oil production could have an effect on natural gas production. Oil production has, in fact, decreased by about 1.5 million barrels per day over the past four weeks, which represents a significant portion of production in the U.S. Has this, in turn, led to a decrease in natural gas production?

The short answer is “yes”. The long answer is that it varies by region, but not all that much. A year-over-year comparative analysis reveals that, in total, dry gas production in the U.S. was around 5 percent higher in 2020 compared to 2019 until the end of March, after which it began to decline until plunging below 2019 levels -- which is where it is now. 

Production is down relative to last year in every region, but the rate of decline varies regionally:

 

North (Northeast and upper Midwestern U.S.)

Production in this region was steady at around 34 billion cubic feet per day (Bcf/d) up until as recently as last week. The sudden drop to the 32 Bcf/d level could be due to EQT (the largest gas producer in the U.S.) cutting production significantly, or due to reduced output from the Marcellus and Utica shale regions (or both).

 

South (Southeastern and lower Midwestern U.S., plus Texas)

The production decline in this region has been less abrupt, with output beginning to drop in late April and crashing through May to around 40 Bcf/d (down from 44 in March and April).

 

West (Northwestern and Southwestern U.S., plus Rocky Mountain region)

Here, too, the decline has been gradual, but production began to diminish as early as the end of March. This region in particular could be sensitive to the price and production levels of oil. Today, production is close to 12.5 Bcf/d, down from almost 14 at the end of March.

 
With production down, another hot summer could result in higher gas prices. Western regions in particular could see elevated prices if, for instance, Texas has a hot summer and creates demand closer to the point of production. Pricier gas, in turn, can cause power prices to climb, too. Crude oil prices are probably not the only reason for these dips, which is why a more granular perspective is sometimes needed in order to get the full picture.

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Posted: May 21, 2020

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