Although natural gas demand remains extremely strong, supply continues to surge.
Low inventory levels have not enough to overcome the bearish psychology that has gripped the natural gas markets for the better part of the last decade, and we do not see this trend changing anytime soon. The reason for the disconnect is the continued huge surge in US production from the shale basins. In past writings, we have discussed how the incredible geological properties of the Marcellus, Utica and Permian basins have severely changed the supply and demand dynamics in the North American gas market. To put this into perspective, the best Permian oil well today is approximately twice as productive as the average first generation Bakken oil well from a decade ago. On the other hand, the latest top-quality Marcellus gas well is up to fifty times as productive as the original Barnett wells and (unlike the oil shales) the inventory of top-tier gas drilling locations seems to be getting larger by the day.
Trailing 10-year Natural Gas Prices
As a result, US dry gas production grew by an unfathomable 7.3 bcf/d during the first quarter of 2018 year-on-year (the last quarter for which we have complete data). This rate of growth is now nearly 25% higher than the previous all-time record set in the fourth quarter of 2014, despite the fact that the industry is turning nearly 45% fewer rigs today than three years ago. To emphasize how different this is from the oil shales, consider US crude oil production is growing nearly 5% less than the last peak in the fourth quarter of 2014 despite a rig count that is within 10% of where it was back then.
We have long described the challenges faced by the North American natural gas industry. However, there are demand developments taking place in the rest of the world that are incredibly promising. We first started writing about global natural gas demand in our quarterly letter nearly a decade ago. At that time, we explained how as a country gets richer, it develops a preference for burning a cleaner fuel. Civic unrest in China regarding air quality over the past decade is a perfect example of this force at work. Natural gas is a much cleaner alternative to coal for generating electricity, however the infrastructure required to store and transport natural gas is much greater since it is in a gaseous state under normal conditions. Because of this, coal can be as high as 65% of an emerging-market economy’s energy mix. In our 2009 letter, we estimated that China would begin to move towards a higher mix of natural gas in its fuel burn and that gas demand would surge between 2010 and 2020.
Please subscribe to our blog and keep an eye out for our next quarterly letter, in which we will discuss the dynamics of the global natural gas market and the implications going forward for the next ten years. We believe global LNG may be setting up to be one of the most important areas of the global natural resources market in the coming decade.
To read more of our Q2 2018 letter, please download it here.