Marcellus Natural Gas in Northeast Drives Record U.S. Output

Jul 15, 2014 5:17 am ET

(Updates price in 12th paragraph.)

July 15 (Bloomberg) -- Record natural gas production from the Marcellus shale deposit in the Northeast is helping send U.S. output to an all-time high, as hydraulic fracturing and horizontal drilling unlocked underground supplies.

Gross output from the region will average 15.235 billion cubic feet a day this month, up 28 percent from a year earlier, and 15.482 billion in August, the U.S. Energy Information Administration said yesterday in a monthly report. Marcellus gas accounts for about 16 percent of gross U.S. production, up from 2 percent in 2008.

Marcellus supplies are contributing to record U.S. output, a change from six years ago, when federal regulators were evaluating plans for gas import terminals to make up for a domestic shortfall and cut prices. Exports from the Gulf Coast are now scheduled to start next year as prices that have dropped 70 percent since July 2008 make the fuel attractive to overseas consumers.

“This is the latest round of big numbers from the Marcellus,” Martin King, an analyst with FirstEnergy Capital Corp. in Calgary, said in a phone interview yesterday. “There is more focus on supply and how that is weighing on prices.”

The supply glut near the biggest cities in the East is keeping spot prices at a discount to the benchmark Henry Hub in Louisiana during periods of lower demand, a switch from the normal configuration.

Spot Gas

Spot gas on the Transco Zone 6 pipeline for New York City dropped 4.1 percent to $2.24 per million British thermal units July 11 on the Intercontinental Exchange, $1.85 below the Henry Hub price and the lowest since April 25, 2012. The New York price has averaged 31 cents above Henry Hub over the past five years. Prices at Algonquin City Gates, which includes Boston, fell to $2.5885 per million Btu on July 11, the lowest since June 13, 2012.

“This supply growth, coupled with known transportation constraints, is responsible for increasing price weakness in the Appalachian region this summer,” Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York, said in a note to clients yesterday. “We see the potential that rising Marcellus production is poised to permanently disrupt the traditional Gulf-based pricing paradigm.”

Gas production from the six largest U.S. shale fields climbed 1.1 percent to 40.145 billion cubic feet a day in August, today’s Drilling Productivity Report showed. Output gains have contributed to a surge in U.S. stockpiles, which dropped to an 11-year low in March.

Total U.S. marketed gas production will rise to a record 73.08 billion cubic feet a day this year, the EIA said July 8.

Stockpile Gains

Supplies of the heating and power-plant fuel climbed 1.2 trillion cubic feet from the end of March to 2.022 trillion in the week ended July 4, an EIA report last week showed. It was the fastest pace of storage injections for the first 14 weeks of the stockpiling season since 2001.

A deficit to five-year average levels has narrowed to 28 percent from a record 55 percent in March as supply gains topped 100 billion cubic feet for eight straight weeks, the longest streak of triple-digit gains in government data going back 20 years.

Gas futures on the New York Mercantile Exchange dropped 5.6 percent since March to $4.127 per million Btu in electronic trading today as rising stockpiles eased concern that supplies wouldn’t be high enough before demand peaks next winter.

“There’s too much supply in the region and there’s not enough takeaway capacity,” King said. “That regional sentiment is probably weighing on Nymex prices to some degree.”