How natural gas production and drilling trends impact propane supply

Over 80 percent of propane supply comes from natural gas processing. Therefore, to determine the outlook for propane supply, it’s essential to keep up with natural gas production and drilling trends.

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There has been a slowdown in the growth of natural gas supply recently, though it is still near record highs. Drilling activity in both the United States and Canada has been slowing this year.

Canada had over 100 rigs active in 2017. That number dropped to 32 in July of this year and stands at 45 as of
Sept. 7.

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The United States currently has 160 rigs drilling for natural gas. That is down from 195 in March. To put that number in perspective, there were 1,606 rigs drilling for natural gas in August 2008.

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According to the U.S. Energy Information Administration’s (EIA) Short-term Energy Outlook, “U.S. dry natural gas production will average 91.4 billion cu. ft. per day (bcf/d) in 2019, up 8.0 bcf/d from 2018. EIA expects monthly average natural gas production to grow in late 2019 and then decline slightly during the first quarter of 2020 as the lagged effect of low prices in the second half of 2019 reduces natural gas-directed drilling. However, EIA forecasts that growth will resume in the second quarter of 2020, and natural gas production in 2020 will average 93.2 bcf/d.”

Based on those numbers, growth in natural gas production was about 10 percent between 2018 and 2019, but will be less than 2 percent between 2019 and 2020. That means there should be a corresponding slowdown in the growth of propane production.

Demand for propane both domestically and for export has struggled to keep up with this year’s rapid growth in propane supply. However, if growth in the supply of propane slows in 2020, there is a good chance of a more fundamentally balanced market. Should the U.S.-China trade dispute be resolved, there will be a good chance that new propane export capacity will be used, helping to limit U.S. propane inventory gains.

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