Natural Gas Production Recovery Set To Challenge Market Fundamentals

Over the past week, Lower 48 gas production increased by ~1.4 Bcf/d.

Following the severe drop in March due to abysmal pricing, Lower 48 gas production is set to increase further with natural gas prices averaging well above $2.5/MMBtu along the curve.

Source: CME

For most natural gas producers, the current STRIP is very supportive of economic drilling programs, and we expect more producers to announce higher hedging positions by the time of the Q2 earnings release.

As we wrote a month ago, the market isn't doing any favors for natural gas producers when it ramped prices back up in a hurry. The bloated natural gas storage situation has not dissipated, and with production making a recovery, higher natural gas demand will be absorbed by the higher production level.

As you can see on the total gas supply vs total gas demand chart, total gas demand is ~3 Bcf/d higher y-o-y, while total gas supply is also ~3 Bcf/d higher y-o-y. Any further increase in production will simply eliminate the structural improvement we see in demand this summer.

The key to sustaining a deficit in the natural gas market is for Mother Nature to lend a supporting hand. Currently, weather forecasts show a hotter-than-normal outlook, albeit the weekend update showed less cooling demand on the horizon.