US Natural Gas Supplies Overestimated

The Energy Department says it has been overstating US natural-gas output for quite some time.

Each month, the Energy Information Administration releases gas-production data, known as the 914 report. The report is supposed to indicate how much natural gas the US produces, how much we have in stockpiles, and how much the nation is using.

Among other things, the data helps predict future natural-gas prices.

The problem is that the 914 report doesn't reflect the production swings of hundreds of small producers. And that has led to an overstatement of gas supplies of up to 10-12%, according to analysts.

That's a significant miscalculation, and the overestimate was responsible for pushing prices to seven-year lows in 2009.

The depressed prices may not last much longer. For its future reports, the agency will use new methods to estimate gas supplies. The January and February numbers will be revised later this month. The numbers for all of 2009 will also be updated, but those numbers won't be available until late fall.

Some commodities analysts have long suspected that the EIA was overstating domestic natural-gas output. For example, the EIA data showed that gas supply rose 4% in 2009, despite a 60% decline in onshore gas rigs.

However, the new methods of collecting data will likely lead to a downward revision of the nation's gas production. And that will ultimately affect gas prices.

Ben Dell, an analyst with Sanford C. Bernstein, believes production is actually falling. When that is fully realized, gas prices will be pushed "much higher," he says.

The monthly EIA reports contain what is known as the "Balancing Item", which represents the difference between the supply of natural gas and the demand for it. It is supposed to account for any discrepancies.

However, the numbers have not always added up, meaning that EIA data either overstates production or understates demand, or a combination if the two.

Either way, markets rely on accurate information to determine supply, demand and pricing. It's self-evident that if production has been overestimated, prices have been inaccurate for some time.

That's about to change.

Natural gas prices have already shot up 11% just this week.