Energy analysts have been looking for signs in the government’s monthly natural gas production reports about whether the pullback in drilling last year has impacted supplies, and there appears to be more indications that the market is tightening, according to the Energy Information Administration’s (EIA) monthly report for December.

Gross daily natural gas output in the Lower 48 states moved 0.7% lower in December, pressured by cold weather that stymied production, the EIA said in its latest report. Gross production in December totaled 62.82 Bcf/d, down slightly from November’s revised output of 63.28 Bcf/d, the EIA said. According to the government data, production in the Lower 48 states has fallen 0.9% since August 2008, when the rig count was at its peak of 1,606 and gross output was 63.38 Bcf/d.

In Louisiana, where producers are tapping Haynesville Shale deposits, production grew for the 12th straight month in December, the EIA report noted. However, in Texas output was down 0.3%, while it fell 2.4% in Wyoming. The largest drop was in New Mexico, where output fell 6.1% as “cold weather hampered operations.”

The December figures confirmed the EIA-914 production data, but “surprised on a few other fronts,” said Barclays Capital analyst Jim Crandell. “Similar to the EIA-914 for gross withdrawals, which showed a sequential decline of 0.5 Bcf/d for the Lower 48, marketed production fell 0.4 Bcf/d and dry gas production fell 0.5 Bcf/d. Again, similarly, New Mexico and Wyoming hosted the largest production declines sequentially, falling 0.24 and 0.16 Bcf/d, respectively.” Louisiana’s marketed production, he noted, grew for the 12th straight month.

Anecdotal evidence pointed to a “substantial number of wells freezing off” in December, said Crandell. However, “This is a temporary phenomenon and should reverse somewhat in subsequent months to the extent freeze-offs are fixed.”

For gas bulls, the news may not be as good, said the Barclays analyst. Even though gas output fell month/month from November to December 2009, “all production metrics finished the year at about the same level they started; as a result, 2008-09 annual average growth was 2.3 Bcf/d across the board.”

Tudor, Pickering, Holt & Co. (TPH) analysts noted that in some supply and demand categories, based on its 2008 Natural Gas Annual Report, EIA revised data back to January 2007. The revised data lifted 2007 production (not demand) higher by 0.5 Bcf/d and revised 2008 output lower by 0.3 Bcf/d. The adjustments, said the analysts, “are still relatively minor given the U.S. is a 60 Bcf/d market.”

However, the balancing item implied that there was an overstatement of supply (or understatement of demand) of 0.6 Bcf/d in 2007, 0.4 Bcf/d in 2008 and 2 Bcf/d in 2009, the TPH team noted. The EIA’s figures don’t appear to “clear up” the balancing item, which is a “reconciliation between the implied inventory change (from supply, demand, imports) and the actual storage change.”

The revisions didn’t impact 2009 numbers or the preliminary December 2009 supply/demand figures, the TPH analyst said. However, 4Q2009’s balancing item “indicates a whopping 6 Bcf/d oversupply…or 2 Bcf/d larger than in 4Q2007 and 4Q2008 average balancing items. Bottom line: 2009 supply numbers are likely to be revised lower in the coming months. Meanwhile, weekly storage data is pointing to a tighter market than lagging/less accurate supply/demand data.”

Barclays’ Crandell noted that end-use sector demand was “heavily influenced by temperatures in December that were 6% and 11% colder than the 30-year and 10-year normal, respectively. Compared with December 2008, demand was essentially flat in the residential and commercial space (on a similar amount of heating degree days), but demand in the industrial and power sectors were each up 1.3-1.4 Bcf/d. Better comparables in the power sector likely reflect a smaller, but still present, level of coal-to-gas switching, as also hinted at in EIA’s Electricity Flash report,” which was released in late February.

“Industrial demand surprised our forecast to the upside, as it grew 8% year/year [y/y],” said Crandell. “This recovery materially outpaces IP [industrial production], which fell 2.1% y/y, and gas-weighted IP, which increased 2.2% y/y, in December. Skeptics will point to the size of the balancing item, at [minus] 242 Bcf, the largest ever. Whereas the monthly change to stocks was a reduction of 699 Bcf, balancing the reported supply and demand components results in a withdrawal that is 242 Bcf less, or 457 Bcf. Historically, however, December does feature the largest balancing item, averaging minus 145 Bcf since 2001, which discounts the absolute size of the December 2009 balancing item.”

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