By Christine Buurma
May 9, 2016 — 7:01 PM EDT Updated on May 10, 2016 — 2:45 PM EDT

Natural gas futures have soared since March on speculation that supplies are finally falling after a decade of gains. Production numbers tell a different story.
Prices have gained about 30 percent from a 17-year low in March, the biggest advance for the period since 2002, as investors including Greenlight Capital’s David Einhorn bet the market would put a dent in supply. While money managers turned bullish on the fuel last month for the first time since 2014, government forecasts show output climbing for the next seven quarters. Explorers including Cabot Oil & Gas Corp. and EQT Corp. outpaced their own production outlooks.
Drillers are beating estimates as the price collapse forced them to become leaner, producing more fuel with the fewest rigs since at least the 1980s. Gas output from the Marcellus shale in the U.S. East is pushing stockpiles toward an all-time high. A rebound in crude oil prices threatens to boost supplies of gas extracted as a byproduct.
“The Marcellus is still going like gangbusters,” said Stephen Schork, president of energy consulting company Schork Group Inc. in Villanova, Pennsylvania. “We’re probably going to see some oil production rising as prices improve, which means associated gas production will also come back.”
Next-month gas futures have climbed from an intraday low on March 4. Futures for 2017 have risen even more, surging 36 percent to trade above $3 per million British thermal units. West Texas Intermediate crude, the U.S. benchmark, has risen 21 percent this year and closed at $44.66 a barrel Tuesday in New York.

Explorers are extracting more gas from the Marcellus formation, America’s biggest reservoir of the fuel, even as prices trade at the lowest seasonal levels since the 1990s. Production expanded 18 percent at EQT Corp. in the first quarter and 8.4 percent at Cabot. Marketed gas output rose to a fifth straight annual record last year, driven by shale output, which now accounts for two-thirds of total U.S. production.
“Cabot will be able to economically grow our natural gas production in 2017,” Dan Dinges, the company’s chief executive officer, said on Cabot’s first-quarter earnings call April 29. “It does not take a lot of rigs and does not take many frac crews to be able to ramp our production with the quality of rock that we have.”
Potential Demand
Gas bulls need a hot summer to spur demand from power plants. Unless that happens, inventories will approach physical storage limits, capping any prices gains.
“There’s always the risk of lower prices,” said Gordon Douthat, a senior equity analyst at Wells Fargo & Co. in Denver. “It’s probably going to come down to the demand side. If we get a cool summer, we’re going to start to have concerns about high stockpiles.”
Companies that primarily produce oil have also contributed to the gas supply gains. Continental Resources Inc., the Oklahoma City-based company credited with kick-starting the oil boom in North Dakota’s Bakken shale, boasted record-high output in the first quarter largely because of rising gas production.
Improved drilling technology has made explorers more efficient, boosting output even as they reduce costs. While the number of rigs has fallen dramatically, producers are drilling several wells from the same site, cutting longer horizontal segments through shale rock to yield more gas.
Greater Efficiency
“Efficiency gains have enabled producers to drill wells faster, and some gathering pipelines came online earlier than expected, allowing them to beat well performance estimates,” said Douthat. “There were a few things that came together that allowed these guys to come in ahead of expectations.”
Bullish traders are undeterred, looking to pipeline data that signal a slowdown in production after supplies reached an all-time high in February. Most of the first-quarter production gains came from wells that were drilled months ago, and demand is climbing as U.S. exports rise and power plants switch to gas from coal, Douthat said. And meteorologists are predicting a hot summer in the eastern and central U.S., which would stoke demand from electricity generators.
“The high cost of liquefying and transporting natural gas limits competition to North American sources,” Greenlight’s Einhorn said in a quarterly letter to investors. “As existing wells deplete, supplies should fall.”
Further Declines
Still, output has proved more resilient than analysts anticipated, making the gas market vulnerable to further price declines. The so-called fracklog, or backlog of wells drilled before 2016 but still uncompleted, in the Marcellus has expanded to about 650 as low prices force producers to reduce expenses, data compiled by Bloomberg Intelligence show. If gas rallies, explorers may start to produce gas from these wells, curtailing a rebound.
Analysts have had a hard time gauging when the tipping point for gas production will occur. This time last year, forecasters were expecting futures to average $3 in 2015. The actual price was almost 40 cents lower. Prices also fell short of estimates in 2014 and 2013.
“Never underestimate the Marcellus,” Mark Hanson, an equity analyst at Morningstar Inc. in Chicago, said by phone May 6. “Hypothetically, if gas goes to $3.50 tomorrow, the Marcellus becomes an insanely attractive play. It would only take 15 or 20 more rigs to ramp up production in a meaningful way.”