Simmons & Co. International analysts are predicting that U.S. natural gas production will fall by 600 million cubic feet per day (MMcf/d) or by 1% in 2016, the first such decline since 2005.

The sharpest slowdown will be seen in the Marcellus and Utica shales, where production is forecast to grow by 1.8 Bcf/d compared with 4.6 Bcf/d in 2015.

The firm also predicts that the gas rig count will fall by another 55 through the end of 2016, reducing horizontal and vertical rigs to 171 from 226. The horizontal rig count will fall by 20% to 132 from 166 by year-end 2016.

“Given that both oil and gas prices have declined further since mid-December (current ‘16 NYMEX: $39.40 WTI/ $2.20 HHUB with prompt month at $1.77), we are further reducing the gas rig count,” said Pearce Hammond, managing director and co-head of E&P research, in a Dec. 22 report.

In a comprehensive analysis of the natural gas market, “Simmons Natural Gas Macro: 2016 Update” outlines natural gas demand, supply, increased takeaway capacity, storage concerns and increased competition from nuclear and renewable energy.

“Some may question the prospect of declining gas production next year given that over the last few years, total gas production has meaningfully exceeded analyst gas production estimates,” Hammond said.

Production in 2016 is shaping up with the E&P sector under formidable duress.

Pressures include:

  • Imploded commodity prices and cash flows;
  • Exponential increase in the cost of capital;
  • Strained balance sheets;
  • Severely reduced capital spending and drilling and completions activity; and
  • Low gas prices potentially leading to further production curtailments.

“With downside gas price risk both a continued and material possibility, a defensive approach to investing in gas levered equities remains warranted,” Hammond said.

Weather Blame

The unseasonably hot months leading to January have built record gas inventories and driven natural gas prices to near 14-year lows.

El Niño conditions have played a role. Year-to-date temperatures across the globe were 1.57F higher than the 20th century average, according to the National Oceanic and Atmospheric Administration (NOAA).

Of the first 11 months of 2015, nine have had record warm temperatures for their respective months, NOAA said. In the U.S., November brought above average precipitation in the Great Plains, Midwest and Southeast, producing the fourth wettest November since national recordkeeping began in 1895.

“However, the market’s understandable fixation on weather is masking improvements currently unfolding in the market, the most important of which is the steep decline in gas production growth, from 6-7 Bcf/d year-over-year earlier this year to currently flat to slightly down,” Hammond said.

If the remainder of the 2015-16 weather experiences typical weather, gas inventories will likely hit 2.1 Tcf by April 1, 31% greater than the five-year average. By November, inventories will reach 4 Tcf, 5% greater than the five-year average.

However, should winter temperatures remain similar to the winter ending in April 2012—one of the warmest since 1895—natural gas storage could bust at the seams. By April, storage could reach 2.6 Tcf before subtracting any changes for higher levels of gas fueled power generation.

Thar She Blows

Natural gas storage continues to hit record levels, begging the question of whether the right conditions could max out storage capacity.

The week of Nov. 20, the U.S. Energy Information Administration (EIA) reported a record volume of stored gas at 4,009 Bcf.

“The likelihood of testing new record levels of gas storage are high if the warm winter persists,” Hammond said.

U.S. gas storage was 3,846 Bcf for the week of Dec. 21, a record based on historical volumes—541 Bcf, or 16.4%, greater than last year, Hammond said.

“The surplus relative to last year and the five-year average is set to widen over the next few weeks based on the above average temps in the weather forecast,” Hammond said. “The best and worst areas for working gas storage currently are: South Central is the worst at 14.8% above the five-year average and the Mountain region is the best at just 2% above the five year average.”

The maximum capacity of gas storage in U.S. facilities at any time, but not all at the same time, is 4,336 Bcf, according to the EIA.

Hammond said salt dome storage in the South Central region should be monitored. The domes are 33.8% above the five-year average.

“Salt dome storage is the most flexible to respond to changing gas market conditions. If they fill up, then gas storage could lose some needed flexibility,” Hammond said.

Strange Demands

The strange world of natural gas has the U.S. with record amounts of natural gas production and storage while simultaneously remaining a net importer of natural gas in 2016.

Domestically, demand from residential, commercial, industrial and other sectors will likely fall, with power generation shaping up as the key user. In 2016, Simmons analysts estimate a steep decline in net gas imports, with a decline of 1.6 Bcf/d year-over-year to 0.7 Bcf/d.

That’s largely due to improving exports to Mexico, reduction in Canadian net imports and the start-up of Lower 48 LNG exports.

“The U.S. should flip to being a net gas exporter in 2017 as more LNG comes online,” Hammond said.

The LNG trade should contribute additional draws on supplies.

Cheniere Energy Inc.’s (NYSE: LNG) Sabine Pass Train 1 is currently starting up and will likely reach full capacity in April, Simmons said.

Cheniere’s Train 2 appears to be headed for a start up in August with a full ramping up by October.

Natural gas’ “shining star” continues to be Mexico, which Simmons estimates will increase to 3.4 Bcf/d in 2016 compared to 2 Bcf/d in 2014.

Still, with so much supply, power generation will be the "relief valve for the natural gas market,” Hammond said.

Overall, total demand is forecast to shrink by 0.5 Bcf/d in 2016.

Darren Barbee can be reached at dbarbee@hartenergy.com.