NatGas Inventory at Start of Heating Season (1 Nov. 2016)
June 2: 32% higher than 2015, 35% higher than five-year average
June 9: 28.5% higher than 2015, 32% higher than five-year average
June 16: 26.3% higher than 2015, 30% higher than five-year average
June 23: 25% higher than 2015, 28% higher than five-year average
June 30: 23% higher than 2015, 25% higher than five-year average
Estimates inventory for the injection season ending 31 October 2016 based on 2% average drop per week times 4 weeks in July, August, September, and October! (4 X 4 X 2% drop per week = 32% drop in inventory at the end of injection season and 7% lower than 5-year average.) This assume June weather will average July, August, September, October! But this excludes increased demand for LNG exports and increase in Mexico exports, so this estimate is on the safe side unless production rises sharply.
Since drilling is just now starting to pick up, it will take a least 3 months for production to rise. Furthermore, CHK told me they were now drilling 7,500 foot laterals with a total of 10 tier 1 rigs. The old cost was $1000 per foot, but the new tier 1 drilling cost for the 7,000-foot laterals is now under $500 per foot and will produce more oil and gas for longer than tier 2 and 3 wells. This supposedly drops the cost of a MMBtu down under $2, which will make them far more profitable. CHK also told me that they plan to be drilling 10,500-foot laterals by the end of 2016. This should bring cost down to $1.75 per mmBtu.
But this causes a bit of fear! Is there enough tier 1 rigs to meet the shale drilling demand in the US and Canada? From the way its looks, there is a looming shortage of tier 1 rigs. And, it makes zero sense to drill an expensive hole with a tier 2 unless drillers drop the price for these rigs to under $250 per foot. But I don't see how they can do it. I looks like all the tier 2 and 3 rigs are nothing but scrap.
If there is a shortage of Tier 1 rigs to drill the long laterals, it is highly doubtful that production can indeed increase until maybe the end of November or December.
So bottomline is that natgas storage will no doubt enter the winter heating season at about the 5-year average!
On the other hand, hurricane season starts soon so there could be a lot of disruptions and flooding in and around the major gas plays that could cut production by 15%.
Then there is the other problem. If we get a bitter cold winter, then we will never have enough gas in storage to last us through the heating season.
Bottomline, we are at the mercy of the weather gods! Does anyone know any Weather God prayers, cold weather dances, chants, charms, or crystal balls we can consult?
If the weather lets us down, Chesapeake Energy will be eaten alive by the shorts!
