Gas prodcers not slowing production enough.... hardly

I saw the following headline on 24/7 Wall St yesterday afternoon "Natural Gas Producers Can’t Slow Down Fast Enough (XOM, CHK, EOG, UNG, OIH)". The related article can be found here.

The headline definitely catches your eye. I can only surmise that author was hanging his hat on that the weekly storage builds of 66 Bcf was 5 Bcf above the consensus estimate of 61 Bcf. Oh the apocalypse. But is it correct to say natural gas producers cannot cut fast enough. No, not really.

Now it is true that current levels of natural gas in storage remains above the five year average. However, the differential is declining rapidly. The below chart shows the historical trend of weekly natural gas storage levels relative to the 5-year average.

The current cycle peaked at an all-time high of 755 Bcf on March 30 of this year, but has ratcheted down to just 265 Bcf currently. The rate of the decline is at a pace close to historic highs. The below chart shows the 13-week slope of the storage differential. 



The question is is the rate of decline due to production cuts or increased demand. According to the information we have available, the decline in storage levels is largely due to production cuts. The U.S. Energy Information Administration (EIA) reports that gas consumption fell by 165 Bcf and 91 Bcf in April and May (the latest available), respectively. This compares to storage levels that fell by more than 235 Bcf over the same two months. Net, net, this implies that production rates were taken down significantly.

I can only surmise that the hot summer weather that followed in June and July helped the rate of demand. However, I do believe that the bump in demand from the weather was partially offset by the slow down in the economy, which implies that production rate cuts continue. I think this is validated by the significant reduction in natural gas rigs, as reported by Baker Hughes.

So are natural gas producers not slowing production enough........ hardly.