Robust production continues to bog down natural gas prices (Part 4 of 7)

(Continued from Part 3)

The U.S. Energy Information Administration’s (or EIA’s) February Short-Term Energy Outlook (or STEO) projects total dry natural gas production to grow by ~5% to 73.9 Bcf (billion cubic feet) in 2015 and by ~2% to 75.38 Bcf in 2016. According to EIA estimates, dry natural gas production was 70.43 Bcf in 2014.

High production levels are bearish for natural gas prices. Weak prices hurt the margins of gas-producing companies such as Ultra Petroleum (UPL), Range Resources (RRC), and QEP Resources (QEP). All these companies are part of the Vanguard Energy ETF (VDE) and make up ~1% of the fund. RRC and QEP are also components of the Energy Select Sector SPDR ETF (XLE) and make up ~1% of the fund.

According to the EIA, dry gas production in December 2014 was ~74.3 Bcf/d (billion cubic feet per day), which is ~12% higher than it was in December 2013.

The EIA also stated that dry natural gas production will average 72.7 Bcf/d February through March. This is 5 Bcf/d higher than the same period in 2014. This will help moderate prices to an extent.

In the week ended March 6, dry gas production increased 0.6% over the prior week. It was  8.7 % higher than levels reported in the corresponding week last year.

Dry natural gas is the natural gas that remains after liquids such as propane and butane have been removed from the marketed natural gas. Dry natural gas is also known as consumer-grade natural gas.

The EIA continues to be bullish about natural gas production in 2015. Read Must-know: Why the EIA is bullish about natural gas production to find out more.

Continued production growth have created a grim scenario for natural gas prices. The EIA forecasts that monthly average prices will remain below $4 per MMBtu (million British thermal unit) levels through most of 2015 and 2016.

Natural gas inventories are governed by natural gas production and consumption trends. In this part, we saw how high production levels have depressed natural gas prices. In the next part of this series, we’ll look at whether strong consumption trends could help push prices up.

Continue to Part 5

Browse this series on Market Realist:

• Part 1 - Investors: Keep watch on the EIA natural gas inventory report
• Part 2 - Natural gas inventories dip below five-year average
• Part 3 - Weekly recap: Natural gas prices bounce up and down