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Faltering US gas production growth defies build in rig count, drilling activity

Highlights

July production averages 94.7 Bcf/d, flat to June

US drilling rig count hits 855 in 31-month high

Henry Hub futures edge back toward $8/MMBtu

Steady growth in US natural gas production seen earlier this year appears to have lost momentum this summer in a potentially bullish trend that comes as Henry Hub gas prices edge back toward $8/MMBtu.

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In July, domestic production has trended at just under 94.7 Bcf/d, roughly flat to its prior-month average, data from S&P Global Commodity Insights shows. In March, April and May, US output grew by leaps and bounds climbing more than 3 Bcf/d, or almost 3.5% to hit annual highs at over 95 Bcf/d.

Along with a buildup in drilling activity, the production gains fueled speculation among some market observers this spring that US production growth would continue at a steady pace through summer.

There has been good cause to believe that would be the case.

Since January, the US oil and gas industry has returned nearly 150 drilling rigs to the field in a steady build that has been accompanied by gains in well-drilling and completions. In the week ended July 20, the US rig count was estimated at 855 or its highest since late 2019, according to data from Enverus.

Among the US' largest shale basins – including the Anadarko, Appalachia, the Bakken, Eagle Ford, Haynesville, Niobrara and the Permian – the number of monthly wells drilled has been building steadily over the past two years, most recently totaling 938 in June, or its highest since pre-pandemic, data from the US Energy Information Administration shows.

After bottoming out in Q2 2020, the number of monthly well completions has also been on the rise among the group of seven major basins, with a combined total of 964 in June – just below the pre-pandemic pace when completions trended closer to 1,100 per month, EIA data shows.

Production outlook, prices

This spring, as US production and drilling activity were on the rise, forecasts from Platts Analytics predicted output would average comfortably over 95 Bcf/d by mid-summer. The growth anticipated by many analysts and market observers, though, has failed to materialize.

While another wave of production growth is still expected to come by late fourth quarter, when output is forecast to top 97 Bcf/d, the gas futures markets appears increasingly doubtful that anticipated growth will materialize – or that gains could be insufficient to deflate current high prices.

Over the past week, the Henry Hub prompt-month futures contract has surged more than 20% or about $1.30-$1.40/MMBtu. The now-$8/MMBtu price expectation for the near term comes despite a continued production outage at the Freeport LNG terminal. In early June, announcement of the outage appeared to set the US gas market on a course correction, sending gas prices from highs near $10/MMBtu to levels below $6 earlier this month, Platts data shows.

The market's mounting concern over the state of US gas supply extends well beyond summer, though. Even the September and October contracts are now pricing near $7.80/MMBtu – shoulder-season months when both production and gas storage levels often climb sharply ahead of winter.