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Lies, Bad Lies And Natural Gas Statistics



Emotions running high after recent pricing volatility.

Future production fundamentals leaning strong bearish.

Wait for big trader “Elephant Tracks” before wading into the pool.

Emotions are running high for natural gas traders after the fireworks of the past six weeks. I’m currently on the sidelines, and, while I’m long term bearish, nothing goes up or down in a straight line. A relief bounce on colder weather is possible, but not guaranteed. Sentiment can always get worse. The remaining Titanic passengers clinging to the back of the ship were extremely negative and they were 100% right.

Please do your homework before you enter a commodity trade. The risk is high. I strongly advise new investors to explore the best production companies with exposure to both oil and gas. Names like Cabot (COG) and Pioneer (PXD) come to mind, and Cheniere Energy (LNG) (CQP) is in a unique position to benefit from ‘lower for longer’ natural gas prices via Sabine Pass and their expansion plans. Many love the excitement of trading the leveraged ETF products. This series of articles will help investors in both categories as we focus on short and long term strategies across the energy universe.

Future production indicators for North American natural gas include:

  1. Drilling rig count: Updated weekly by Baker Hughes and available for free. If you haven’t looked at the pdf from their website, do yourself a favor. It contains invaluable details like shale basin breakdown that are rarely covered in the headline news articles. Knowing the difference between the Permian and Appalachia matters.
  2. Drilled Uncompleted Wells (DUCs): the EIA publishes a monthly drilling report which is essential reading for energy investors.
  3. WTI Oil Pricing/World Oil Pricing: West Texas Intermediate (WTI) pricing is an integral part of the equation for nat gas due to associated production from oil drilling. WTI pricing relative to year ago levels provides a useful indicator for associated production trends. Given the substantial growth in U.S. refined product exports, we also need to track world oil pricing via the Brent/WTI spread.
  4. Midstream expansion/contraction: Midstream refers to the network of pipelines that move energy commodities from production centers to refineries, local distribution companies (LDCs), export facilities, etc.
  5. Canadian Production: We’ll save this topic for deeper analysis in a separate article.

Current U.S. lower-48 state (L48) production is bumping against all time highs near ~76-77 bcfd after bottoming near ~70 at the start of 2017. This is not a surprising number if you’ve been following the future production indicators.

The rig count crashed following Saudi Arabia’s attempt to crush L48 shale production with their market moving decision to flood crude worldwide in November 2014. Dramatically lower crude prices had the desired impact with rig counts plummeting worldwide and hitting bottom in mid-2016. Since then, the rig count has recovered substantially leading to Clue #1, more drilling.

How can we be sure the rig level is adequate to maintain current natural gas production levels? Clue #2, DUCs have risen substantially the past eight months. Specifically the Permian basin has a giant DUC inventory that appears to be growing out of control with no end in sight. This will impact Waha hub pricing and nat gas supply for Mexico and the gulf coast, more on this later. The most important basin is Appalachia formerly known as the Marcellus and Utica shales. The DUC count for Appalachia is showing slightly positive growth at a level that’s ~75% of the ATH DUC count for this region. Although DUCs are down from ATH’s, it’s hard to consider this bullish with Appalachian output strong at ~27 bcfd. Since Rover partially came online in September, total Appalachian output keeps setting and breaking production records on the back of new midstream capacity. The scary fact if you’re bullish is that Rover is effectively only half done and there are many more Appalachian expansion projects coming online over the next 9 months. All of these projects are designed to free additional supply from this low-cost production juggernaut and get the gas to premium markets in every direction. This is a key reason why the natural gas curve has been stuck in the mud and trending lower.

WTI pricing has held above $55, and the stock charts for many of the oil focused majors and medium caps is a strong signal that higher oil pricing is here to stay leading us to Clue #3. Strong WTI vs. year ago pricing means associated gas production is likely to rise. Even worse, WTI pricing is not impacted by nat gas pricing. Natty could go to zero and you’d still get associated output if oil remains strong. The Permian basin is located in West Texas close to Mexico and the gulf coast. Permian associated production will go a long way to feeding new demand for LNG exports and Mexports.

Donald Trump’s election had an immediate impact on North American energy markets leading us to Clue #4, major midstream expansion projects. The Obama administration slowed pipeline development frustrating many investors and gas industry executives who knew the potential of Appalachian output. This changed dramatically in February 2017 when FERC surprisingly approved various pipeline efforts that were held up on bureaucratic red tape. Consensus at the time was that most midstream projects would be delayed by at least a year due to the administration switchover. The most important project was ETP’s Rover pipeline designed to move gas to the key midcon market and then into the massive Dawn hub in Canada. FERC switching gears from a headwind to a tailwind overnight was a big red flag for natural gas bulls. Much has been written on SeekingAlpha regarding the impact of midstream projects. It’s an important area to stay on top of if you invest in oil and gas.

The fundamental forces of gas production are undeniably leaning bearish as shown by the trail of clues laid out above. Does that mean gas can’t rally? Hell no. The most important force in the natural gas market is Mother Nature. Extremely cold weather is needed to offset bearish production levels and reinforce damaged bull psyches. Pricing is weak because December-2016 was an extremely cold month with large EIA inventory withdrawals that were well above the five-year average. Current December temps started off warm leading to the surprise EIA injection reported this past Thursday. If you were on top of future production fundamentals, you were not surprised warm temps allowed the bears to maul the poorly prepared bulls. Difficult December 2016 storage comps were destined to be a problem that would allow the EIA y-o-y storage differential to contract significantly heading into year end. I’m expecting the EIA y-o-y storage gap to shrink to less than 100 bcf by January 1st.

The most important question is what happens next and how do we profit from it? I started this article stating I was safely on the sidelines wearing a helmet and protective gear. I don’t like the risk/reward for either side. When it comes to investing, there’s no Medal of Honor for being the first hero through the door. Investors who bought Apple (AAPL) in 2010 when the first iPad was released are just as happy as buyers during the 2008/2009 financial crisis. The best advice right now is keep watching the tape to see what the big players are doing. These “Elephant Tracks” are impossible for big traders to hide given the huge volumes they move entering and exiting positions. My next article will look at critical inflection points over the past 24 months, and the signals indicating a trend reversal is probable.

The next 10 days will be interesting watching the market react to more typical December weather balanced against mixed longer term forecasts. I don’t see a sustained rally until we have lower production along with substantially lower rig counts and DUC inventories. My fear is sub $2.50 Henry Hub prices could be needed to send the STOP NOW signal to overzealous producers in the absence of colder weather. Extreme cold from now until April 1st would help absorb the extra production, but after two warm winters and a dicey December 2017 start, traders are wondering if Mother Nature is shorting futures in her own account.

Key Data Points:

EIA storage projection for 1/1/18 = 3,220 bcf +/- 35 (based on NOAA CFSv2 four week forecast as of 12/10 morning update & EIA historical data)

~3,220 on 1/1/18 leads to ~1,690 bcf finishing storage estimate in late March 2018 using the five year EIA average withdrawals. For reference the March-2017 finish was 2,049 bcf.

Conclusion: Current EIA storage trends are taking a back seat to future production fundamentals. The market is worried about two things:

  1. Producers will do what they’ve always done through past cycles, over produce.
  2. Substantial new midstream capacity from prolific, low cost shale basins like Appalachia and the Permian will act as an anchor tied to the leg of the Henry Hub.

Thank you for reading.

Seeking Alpha

22 Comments on "Lies, Bad Lies And Natural Gas Statistics"

  1. rockman on Sat, 16th Dec 2017 11:31 am 

    “Specifically the Permian basin has a giant DUC inventory that appears to be growing out of control with no end in sight.” Once again time to remind folks that virtually every well ever drilled (vert and hz) has been a DUC for some period of time. And true for every well drilling today and will be drilled in the future. Wells are drilled by drilling rigs. Almost never see a well completed by a drill rig: costs too much money. Wells are completed by completion rigs. What should be f*cking obvious seems to be not so f*cking obvious to writers like this. First completion rigs cost much less per day then drill rigs. Second, there are infrastructure aspects that can require a week to several months between the end of the drilling phase and first production. Policies vary but for the Rockman and his engineer we tend to not perforate/complete a well until we can flow straight into a gas line or oil tanks. IOW we avoid shutting a well in once it cleans up after perforating it. There’s also the issue of cement integrity: we don’t perforate a zone unless it is not in communication via the annulus with zones above or below it. This requires a good cement bond isolating potentially productive zones. We confirm this by running a “bond log” with the completion rig. If there’s a bad bond we do a “squeeze job” with the completion rig: perforate the casing above or below (or both) the target zone and pump cement into the annulus. And then wait 24 to 48 hours and run another bond log. And repeat the process again if necessary.

    And that’s just for a plain old vertical well. For a hz well a frac crew needs to be scheduled. During the early shale boom days companies were waiting 6+ months for a frac crew due to high demand and a lack of services. The delay had nothing to do with companies wanting to delay production.

    And now today. It can still take 1 to 3 months to schedule a frac crew AND bring together the rest of the components…like the frac sand. A frac crew won’t sit on a location for a month waiting for sand to be hauled 800 miles from a supplier.

    So even if an operator moves as fast as possible every new hz shale well drilled slips into the DUC category for a month or two…or longer. Guess what that means if the rig count increases in a play and the number of wells drilled increases? Yes: the DUC count increases simply because each new well becomes a DUC for some period of time. And while those DUCs are eventually completed new DUCs are being continually added in increasing numbers. And even when the rig count stops increasing new DUCs are continually being added.

    Now more lag time. In Texas when a well has casing run (vert or hz) it is reported to the state as finished drilling. At that point it becomes a DUC. And does it stay a DUC until it is completed? No, it stays a DUC until producing is reported to the state. And do companies report a well to the Rail Road Commission as it begins producing? No, we report when we’ve produced thru the end of a calendar month. IOW if I begin producing on Sept 5 I report my production thru 30 Sept. And do I report that production on 1 Oct? No, I might report it on 1 Nov…or 1 Dec…or maybe even 1 Feb of the following year. The TRRC isn’t very hard nosed about the timing of my production reports. So I finish drilling my well on 15 July and it becomes a DUC when I file my completion paper work on 1 Aug. I move really fast and begin production on 5 Sept. As far as the TRRC (and public) knows I’m still a DUC. And produce thru Oct without filing a production report so I’m still a DUC on 1 Nov. And I file Sept production the first week of Nov. And I’m still a DUC on 1 Dec because it takes 1 to 2 months for the TRRC to process my production report. And I’m still a DUC as far as the public knows on 15 Jan of the following year because it typically takes a couple of months for the TRRC to update the public data base. So finally in early Feb of the following year I’m no longer a DUC…despite the fact that I began producing 4 months earlier on 5 Sept.

    And I’ll keep trotting out that dead horse whenever needed: TIME LAG. And that’s not counting the mathematical absolute that as the rig count increases in a play the DUC count increases. And that increase isn’t because companies don’t want to produce. Usually just the opposite: they are desperate for cash flow.

  2. Anonymous on Sat, 16th Dec 2017 4:01 pm 

    Natgas has been breakeven (net import/export ~0) in 2017:

  3. Anonymous on Sat, 16th Dec 2017 4:03 pm 

    Oops. Wrong thread.

    Per the DUCs, see the Rystad presentation (and audio discussion) from 16NOV on the EIA website.

    Most of the Permian DUCS (80%+) are normal inventory. Not the result of abnormal bottlenecks, not “rotten”. Just more DUCs because of more drilling. Situation normal, IOW.

  4. Anonymous on Tue, 19th Dec 2017 9:20 am 

    Appalachia is now producing more natural gas than the ENTIRE STATE OF TEXAS.

    (source EIA)

    (space) Texas APP
    month MMCF/d MMCF/d pct of TX
    Sep-17 21,870 24,727 113%
    Jan-17 20,725 23,168 112%
    Jan-16 22,868 21,993 96%
    Jan-15 23,923 18,902 79%
    Jan-14 22,458 14,528 65%
    Jan-13 22,106 10,133 46%
    Jan-12 21,981 7,072 32%
    Jan-11 21,113 3,828 18%
    Jan-10 20,144 1,658 8%
    Jan-09 22,211 1,716 8%
    Jan-08 20,241 1,472 7%
    Jan-07 17,566 1,390 8%
    Jan-06 17,026 1,338 8%

  5. Anonymous on Tue, 19th Dec 2017 9:22 am 






    Here are the state contributions:

    (space) Texas PA WV OH APP
    month MMCF/d MMCF/d MMCF/d MMCF/d MMCF/d
    Sep-17 21,870 14,808 4,585 5,334 24,727

  6. Apneaman on Tue, 19th Dec 2017 1:20 pm 

    Anonymous, so? It’s not translating into any overall benefit for your country.

    It’s 2017 and you have more homeless people in San Diego than during the great Depression and they are shitting all over the place and causing a big Hepatitis A outbreak.

    Oh well, I guess it all you’ve got to cling to while the USS America goes under.

  7. MASTERMIND on Tue, 19th Dec 2017 3:26 pm 

    As M. King Hubbert (1962) shows, Peak Oil is about discovering less oil, and eventually producing less oil due to lack of discovery.

    Oil Shortage Feared by 2020 as Discoveries Fall to Record Low – Wall Street Journal

    Peak Oil Vindicated by the IEA

  8. Cloggie on Tue, 19th Dec 2017 3:53 pm 

    “Peak Oil Vindicated by the IEA”

    IEA recommends renewables so we can dump oil altogether and make the “peak oil” story irrelevant:

    “Solar must lead ‘universal energy access’ by 2030, says IEA”

    The IEA will never claim the idiocy, heard often here, that renewables won’t work.

    Thanks millimind, for bringing up the IEA as a beacon of hope.

  9. MASTERMIND on Tue, 19th Dec 2017 4:16 pm 

    Cloggie renewable s are a joke…And only someone who have never critically researched them believes in them. Especially after the blackouts of Southern Australia last year. And Germany’s close call.

  10. peakyeast on Tue, 19th Dec 2017 5:10 pm 

    @Mastermind – those blackouts mean almost nothing. When you move into unknown terrain you are bound to make some mistakes and experience things you didnt anticipate.

    Rumsfeld made it quite clear:
    There are known knowns, known unknowns, unknown unknowns. Or words to that effect.

    Besides never let a good crisis go to waste: Now they installed Musks battery in Australia – at the very least it will give some expertise and knowledge – both on stabilizing grids, but also on battery tech.

  11. Ghung on Tue, 19th Dec 2017 5:35 pm 

    MASTERMIND; “…renewable s are a joke…And only someone who have never critically researched them believes in them. Especially after the blackouts of Southern Australia last year. And Germany’s close call.”

    I’m betting there were some solar folks with battery backup thinking the grid is a joke. I haven’t ‘blacked out’ in 20 years, while most of my gridweenie neighbors were down last week for 1-2 days.

    Depends on one’s perspective I guess.

  12. Makati1 on Tue, 19th Dec 2017 6:37 pm 

    A solar system for the home is a good idea, but, there will be no replacement parts after the SHTF. The electric will flow until the first breakdown. Then they will just be expensive shingles. Most electrical uses will also go extinct about the same time or sooner. A good investment, if you can afford it, I think.

  13. MASTERMIND on Tue, 19th Dec 2017 6:56 pm 


    A solar system for the home does not produce enough energy to power your home on its own ever…Solar is a total joke..If you want a tiny percent of your power bill to go down during the mid day. then its a great idea…People on this site that are vouching for it are idiots and liars.

  14. Makati1 on Tue, 19th Dec 2017 7:08 pm 

    MM, the only limit to a home solar system is your wallet.

    The only limit to rational thinking is your mind set.

    Yours is on the very narrow band. You keep proving your ignorance with every post.

    “We’re creating a world of dummies. Angry dummies who feel they have the right, the authority and the need not only to comment on everything, but to make sure their voice is heard above the rest, and to drag down any opposing views through personal attacks, loud repetition and confrontation.” – Issac Asimov

    Perfect description of you, MM. Perfect.

  15. GregT on Tue, 19th Dec 2017 9:07 pm 

    “A solar system for the home does not produce enough energy to power your home on its own ever…Solar is a total joke..If you want a tiny percent of your power bill to go down during the mid day. then its a great idea…People on this site that are vouching for it are idiots and liars.”

    You are correct Makati. I was being far too generous. More like 80 something. The guy is a complete moron.

  16. MASTERMIND on Tue, 19th Dec 2017 9:24 pm 

    Those people who think they know everything are a great annoyance to those of us who do.

    -– Issac Asimov

    Perfect example of Greg and Madkat…Madkat has already admitted to having no college education. And Greg is a hick so I doubt he even has high school education.

  17. Makati1 on Tue, 19th Dec 2017 10:17 pm 

    MM, the accusation does NOT fit us, except in your deluded mind. Don’t you see yourself or are you blind to your problem?

    Your blind brainwashing that you ‘need’ and expensive “education”, to be ‘successful’, is disproved by your own posts. You have zero ‘education’ and even less intelligence.

    One of my best friends, years ago was a self-made multi-millionaire who NEVER WENT TO COLLEGE. The last contact with his family, years ago, when we visited his $12 million plus home in Paradise Valley, Arizona. He went to Africa several times on a month long safari and had his kills mounted, then sent to the museum in Salt Lake City. I guess he was “stupid” also?

    Why don’t you look up people like:

    Bill Gates – 1 year of college then dropped out.
    Paul Allen – 2 years of college then dropped out.

    I guess dropping out of college disqualifies these two as “intelligent and educated”.

    How about the millions of ‘college educated’ peers of yours who are working as McDonalds cashiers, or worse, not even able to find a job, and living in Mom’s basement?

    I’m waiting for an answer, boy.

  18. Ghung on Tue, 19th Dec 2017 10:30 pm 

    MASTERMIND said; “A solar system for the home does not produce enough energy to power your home on its own ever…Solar is a total joke..If you want a tiny percent of your power bill to go down during the mid day. then its a great idea…People on this site that are vouching for it are idiots and liars.”

    Translation: “MASTERMIND is too much of a fucking idiot to make it work.”

  19. Makati1 on Tue, 19th Dec 2017 10:49 pm 

    BINGO! Ghung, you see the facts. lol

  20. MASTERMIND on Tue, 19th Dec 2017 11:35 pm 


    Bill Gates and Paul Allen were born filthy rich and went to a private school that was one of the first in all of America to buy computers for their classrooms. You never even post anything scholary at all. You hate science and experts. I post study after study proving you are doomed to the same collapse as us. And you post fake news from organic prepper, zerohedge, etc…You are a clown and would be laughed out of college in a second. No Professor would ever accept your sources as credible. You worked for the Mormon church which is about as batshit nutty as it gets.

  21. Makati1 on Wed, 20th Dec 2017 1:12 am 

    MM, money does not buy intelligence. Lack of $$ doesn’t indicate stupidity either. It is only when someone opens their mouth and proves their ignorance that it becomes obvious.

    I am “doomed” as you put it, to collapse, but there are different degrees of collapse and different degrees of living a good life. The US will have the most serious pains and suffering when the collapse comes because they are mostly spoiled, greedy children with no survival skills or even the beginning of any. You are a perfect example, from what can be seen here.

    Whereas, those in the ‘developing’ countries, like the Ps, will have some readjustments back into a lifestyle they probably only left a few years ago. The survival skills are still there. The family farms are there. The social safety net is family and still strong. The “needs” are much fewer and mainly stuff easily attainable.

    Your lack of experience with the real world is obvious, as is your youth. You, not me, will be a likely early casualty of the collapse. I am prepared for it. You obviously are not even contemplating its possibility.

    BTW: Your “professor” will be among the first to fall and probably die. There will be no need for most of them in the new future after. Along with all ‘careers that do not provide a necessity, like in the medical profession. No use for chemists, economists, or engineers when the only need is food, shelter and clothing.

  22. Adrienne on Tue, 30th Jan 2018 6:20 pm 

    I think Ghung wins the comments for today.

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