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April 2, 2018. Supply And Demand Balance In The Southwest

April 2, 2018   sd balance southwest

Important Message

This is a first, introductory, draft report on supply-demand balance situation in the Southwest region of the United States.

We are planning to launch a new Special Report series that will look at the SD balance situation in the Southwest of the United States. We are still working to figure out which data sets we will be able to provide on a regular basis so we haven’t yet finalized the final template for the report. Still, we wanted to share with you the latest data/information that we have and ask for your feedback. Please let us know your thoughts and suggestions.

Where is the Southwest

Different organizations and companies will definite it in their own way. For example, EIA does not even use the term “Southwest”. Instead, the region is called differently depending on the topic. For example, in storage statistics, EIA calls it “South Central” (see the map below).

At the same time, when it comes to consumption statistics, EIA will simply look at the “South” region, which is additionally sub-divided into “West South Central”, “East South Central” and “South Atlantic”. These discrepancies create confusion. Notice, for example, that Kansas is included in the South Central for storage statistics, but consumption-wise, it is part of the Midwest.

At Bluegold Research, we are able to cover all the states that are included in the Southwest, but not for all market variables. See the table below.

Therefore, when we say “Southwest consumption”, we mean natural gas that is consumed in Arkansas, Louisiana, New Mexico, Oklahoma and Texas. When we say "Southwest storage", we refer to the EIA storage data for South Central storage region. When we say "Southwest production", we mean natural gas that is produced in Arkansas, Kansas, Louisiana, Mississippi, New Mexico, Oklahoma and Texas.

Why is Southwest so important?

There are several reasons.

First of all, this is where Henry Hub is physically located (in Erath, Louisiana). Henry Hub is a pricing point for NYMEX natural gas future contracts. Many analysts believe that national natural gas market in the U.S. will become increasingly fragmented in future, leading to large differentials between prices in different trading hubs. Therefore, regional fundamentals can be just as important (if not more important) than national fundamentals.

Secondly, Southwest is a home to a number of major oil and gas fields (basins): AnadarkoEagle FordHaynesville and Permian. In fact, we estimate that 53% of all natural gas in the U.S. (including natural gas liquids) is produced in the Southwest. See the maps below.

Southwest Production Data

  • According to our research, dry gas production in the Southwest is up no less than 20% since the beginning of 2017.
  • More wells are being drilled than being completed and therefore the inventory of DUCs (drilled, but uncompleted wells) is rising.
  • However, the vast majority of DUCs are located in the Permian region, which is mostly dominated by oil;
  • The number of DUCs in gas-dominant regions is declining.

Southwest Consumption Data

  • Consumption is declining (due to seasonal factors) from a very high level reached in mid-January;
  • Under the latest weather forecast, consumption is still expected to decline until April 16 (at least) - the chart below includes 15-day forecast;
  • Consumption usually hits a seasonal low in mid-April;
  • Consumption is up +12% y-o-y;
  • In two weeks time, annual growth rate is projected to decline to +11% y-o-y.

Southwest SD Balance

  • SW SD Balance = SW production minus SW consumption;
  • Note that SW production covers seven states, while SW consumption covers only five states
  • SW SD Balance has been positive relative to 2017 for 10 consecutive weeks now (with all other things being equal, bulls want to see negative changes, while bears want to see positive changes);
  • Natural gas price (5-day average) is down around $0.50 cents from 2017;
  • SW SD Balance is expected to increase by another 4 bcf/day for the week ending April 6 and by another 3.8 bcf/day for the week ending April 13. 

Southwest Storage

SW Storage will be covered in the next report. 

This is a draft report. Please send us your feedback and any suggestions. 

Sources: EIA, ECMWF, FracFocus, Bluegold Research estimates and calculations. 


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