ANALYSIS: US gas production hits seven-month high prompting cash, forward-market revaluations

Denver — US natural gas production is trending at a seven-month high over the past week as producers in Texas, Louisiana and Appalachia reset the outlook for supply and prices this winter.

On Nov. 17, total US output zoomed to its highest since April at more than 90 Bcf/d followed up with another single-day high at nearly 92 Bcf/d on Nov. 23, data compiled by S&P Global Platts Analytics showed.

Recent production gains have added to market jitters over this November's mild weather.

Over the past week, cash prices at the Henry Hub have averaged just $2.28, down 50 cents, or about 18%, from a prior-week average at $2.78/MMBtu. On Nov. 24, the benchmark index was trading up nearly 10 cents day on day at $2.29/MMBtu, showed preliminary settlement data from S&P Global Platts.

The forward market has come under similar pressure in the week ended Nov. 21 with the December, January, February calendar-month average recently settling as low as $2.67/MMBtu. On Nov. 23, the three-month strip was assessed at $2.78/MMBtu, down levels well over $3 earlier this month, Platts most recently published M2MS data showed.

With at least some of the recent gains likely sustainable, the market has good cause for the recent revaluations.

Southeast, Texas

As operators in the US Gulf of Mexico continue ramping up after this year's busy hurricane season, offshore production has climbed more than 850 MMcf/d since the start of this month.

Much of that recent gain has come from Louisiana. Over the past week, production from the state's Gulf waters has averaged 1.2 Bcf/d, up from a prior-month average at 950 MMcf/d. In the nearby Louisiana Haynesville, output has grown nearly 300 MMcf/d over the same period, Platts Analytics data showed.

Gains in both locations appear likely to stick. In the Louisiana offshore, production has only recently returned to levels seen prior to the hurricane season. In Haynesville, a recent uptick in drilling activity and rig count should support a continued rebound from this summer's production lows.

It seems less clear what was behind recent production gains along the Texas US Gulf Coast -- or whether they are sustainable. Still, over the past week, output from coastal leaseholds in Texas has jumped about 110 MMcf/d compared with its prior-month average.

Appalachia

In Appalachia, the sustainability of recent production gains is likely to depend more on this winter's supply-demand dynamics than anything else.

With nearly every interstate production-takeaway pipeline from Appalachia at or nearing its capacity limit, producers there now appear to be making almost daily adjustments to output in response to weather conditions, demand and prices. In November alone, production has moved between record highs and annual lows as operators there fine tune the new-found market strategy.

Assuming heating demand in the more accessible Northeast market-area performs according to a weather-normal forecast this winter, producers are likely to respond to higher prices by keeping production around current levels. A mild winter heating season and weaker prices, though, could prompt more production stops-and-starts -- similar those seen this autumn.