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Analysis: US Northeast production volumes, rig count stall at year's end

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Analysis: US Northeast production volumes, rig count stall at year's end

Highlights

US LNG feedgas demand hits record high

Could lead to tighter market, stronger prices

Denver — As production from the US Northeast stalls and the active rig count declines in the region, the market could tighten significantly and help propel Henry Hub futures later this winter.

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The prompt month Henry Hub contract has tumbled more than 55 cents since early November and is currently hovering around $2.30/MMBtu. While weather has been largely unsupportive of US balances, flagging production, namely in the Northeast, and robust utilization of LNG facilities presents downside risk to end-of-winter storage levels, which S&P Global Platts Analytics currently has forecast at 2 Tcf at the end of March.

US production has averaged 91.8 Bcf/d month to date but dipped as low as 90.8 Bcf/d in recent days. This contrasts with Platts Analytics previous forecast of 92.9 Bcf/d for the balance of winter, a level just reached last month. The Northeast is driving the production decline due to the large decline in rigs and typical seasonal production profile that exhibits a strong end of year run-up before moderating at the start of January.

After peaking at 34 Bcf/d in mid-November, regional production has tumbled more than 1 Bcf/d, dipping as low as 32.4 Bcf/d on Monday, with declines spread across Northeast Pennsylvania, South Pennsylvania and West Virginia. Platts Analytics' forecast for Northeast production for the balance of winter (33.3 Bcf/d) sits about 0.9 Bcf/d above recent postings.

The current Northeast rig count, 49 as of Friday, is at a level sufficient to keep production flat through 2020, but additional rig declines could result in significant production declines in the region. Active rigs in the US Northeast one year ago totaled 77, according to data from Enverus.

Should an additional 20% of rigs be lost by March 2020, Platts Analytics finds Northeast production would average just 32.6 Bcf/d for the 2020 calendar year. At 33.2 Bcf/d month to date, a 20% cut to the rig fleet would see Northeast production fall to 31.6 Bcf/d by December 2020.

Also, LNG feedgas demand is exceeding Platts Analytics' forecast for the balance of winter, further tightening balances. Total US feedgas deliveries reached a new all-time high of 8.51 Bcf/d on Friday, with the recent surge driven by higher flows to Cameron and Sabine Pass.

Deliveries to Cameron reached a new high of 0.8 Bcf/d as commissioning activities ramp up for the facility's second train. Train 2 is scheduled to enter commercial service in April 2020. In addition to Cameron, deliveries to Sabine Pass strengthened back above 4.2 Bcf/d. US LNG feedgas is well on its way to another record-breaking monthly average with the current December average at 7.95 Bcf/d.

Taken together, if US production holds near 91 Bcf/d for the balance of winter, which is not out of the question given recent Northeast production readings and stalling drilling activity, there would be roughly 2 Bcf/d (or about 200 Bcf) of downside risk to end-of-March storage levels in the US.

Stocks could finish the winter about 200 to 250 Bcf below Platts Analytics' current forecast, leaving inventories around 1.7 Tcf exiting the winter. The tightness would likely extend into summer and present an upside risk to Henry Hub prices, especially if rig declines continue in the Northeast.

-- Brandon Evans, bevans@spglobal.com

-- Taylor Cavey, tcavey@spglobal.com

-- Luke Jackson, ljackson@spglobal.com

-- Edited by Gail Roberts, newsdesk@spglobal.com