The United States demand for dry natural gas declined 6 percent YoY and 12.1 percent MoM in the month of May 2013. During the same period, natural gas production increased 0.81 percent YoY and remained fairly stable. This indicates that we can expect bearish trends in the natural gas market.

Gas demand falls short

Total U.S. natural gas demand stood at 56.1 billion cubic feet per day (bcfpd) in May while the total supply during the same period was 66.15 bcfpd. During the same month, the U.S. registered natural gas exports of 4.58 bcfpd, which means that there was still unsold gas at the end of the month.

Figure 1: Total US Natural Gas Demand versus Natural Gas Supply

Gas demand
Source: Bloomberg

The primary source of gas demand is the power industry and it accounted for 32.7 percent of total gas demand of the United States in May 2013. Power demand has been the dominant force in US incremental demand for gas and in May 2012, power demand saw maximum growth and expanded 42.88 percent to reach a demand of 26.36 bcfpd.

However, contractions have been seen in the demand in recent months. The power industry demand has dropped 24.8 YoY as to 19.8 bcfpd as of May 2013. This is the sixth consecutive YoY decline in the monthly data for power sector demand.

Figure 2: Power Demand for Natural Gas

Source: Bloomberg

Given the magnitude of power demand in overall natural gas demand, it is no surprise that total gas demand was pulled down by the power demand.

Supply Spurred by Unconventional Plays

Supply has expanded in the past three years, spurred by the introduction on unconventional gas plays including shale and tight gas.

Gas production during recent months, however, has declined slightly and the supply growth has been curtailed. This has been partly due to shale production hitting peak in many counties and partly due to the reduction in gas prices.

Figure 3: Gas Production versus Gas Prices

Source: Bloomberg
Source: Bloomberg

The natural gas rig count stood at 387 in August 2013, as per latest Baker Hughes numbers. However, this is less than one-fourth of the total gas rigs in August 2008, which stood at 1606. Despite the decrease in the number of rigs, the supply has expanded nearly 18 percent between August 2008 and now.

See: Decline In U.S. Gas Production Imminent

Expansion of shale

Shale plays have expanded in certain counties more than others. ‘Total Marcellus and Utica shale wells drilled in Pennsylvania increased sequentially to 338 from 291 in 2Q. Wells drilled are down 11% yoy, likely due to a shift toward liquids drilling by many exploration and production companies. Susquehanna County, with 68 wells drilled, was the most active county, followed by Washington (63) and Lycoming (61) counties. Wells drilled increased sequentially across the three top counties in the play,’ says Bloomberg.

Figure 4: Shale Gas Wells Drilled Rise in Pennsylvania and Other Counties

Source: Bloomberg
Source: Bloomberg

Range Resources is the most active player in shale and has been the one digging the most number of wells in shale gas.

Figure 5: Shale Gas Wells Drilled by Companies in 2Q 2013

Source: Bloomberg
Source: Bloomberg

Given the expansions in shale gas and the contraction of demand driven by low power demand and low economic growth, we can expect a bearish trend to continue in the gas market. As inventories build up and export markets remain limited, we can expect local prices of gas to come down further.