Natural gas prices have been rising rapidly since mid-November. Winter weather is a key factor in driving prices to their highest level since December 2014.
However, it isn’t just winter conditions that are driving natural gas prices higher. The U.S. supply of natural gas has been falling as well. In November 2014, there were 350 natural gas drilling rigs in the United States. That number dropped to 81 by the week of Aug. 5, 2016. The result has been a drop in natural gas supplies.
For years, natural gas production in the United States had been on a steady uptrend. However, the slowdown in drilling has finally caught up with production, causing a decline. This decline is the real foundation for the rise in natural gas prices.
The impact on propane supply has been significant. Most propane now comes from natural gas processing. Fortunately, natural gas producers have focused their limited drilling activity on wet gas wells. Those wells contain a high content of natural gas liquids. As a result, even though natural gas production is declining, propane supply from natural gas processing remains on an uptrend.
However, as we pointed out in a recent Trader’s Corner, the rate of growth in propane supply from natural gas processing has slowed dramatically. In 2015, propane supplied from natural gas processing was 168,000 barrels per day (bpd) higher than it was in 2014. So far in 2016, propane supplied has averaged just 60,000 bpd higher than it did during the same period last year.
The good news is that the higher price has already begun to have an impact on drilling for natural gas. For the week ending Dec. 2, there were 119 natural gas wells being drilled, up from the low of 81 in August. The increased drilling should slow the decline in natural gas supplies. We can be sure producers are continuing to drill natural gas wells with the highest liquids content. That should mean the rate of growth in propane supplies should start improving again.
Since natural gas production and processing drive propane supplies – and ultimately propane prices – it is good news for propane retailers. It should prevent an undersupplied situation from developing, though we would expect a more balanced supply-and-demand situation going forward. We expect drilling for natural gas to be more measured than it was during the “shale boom.” Many big players, such as Chesapeake Energy, have fallen on hard times since the boom days, which could limit capital expenditures in the future.
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