The supply glut from the shale drilling bonanza meant that October was another record-setting month for U.S. natural gas production from the Lower 48 states.

As per the latest report from Bentek Energy – the forecasting unit of Platts – October natural gas production was up 1.2% from September to 69.9 billion cubic feet per day (Bcf/d), the highest monthly average ever. In fact, the October output was 6% higher year-over-year, while hitting a daily record of 70.9 Bcf on the 24th of the month.

Thanks to the emergence of major shale plays yielding impressive results, Bentek analysis further estimates that average domestic natural gas supply will climb to 67.9 Bcf/d in 2014. To put things in perspective, U.S. production was averaging just 55.1 Bcf/d in 2009, only five years back.

The Shale Revolution

Over the last few years, a quiet revolution has been reshaping the energy business in the U.S. The success of ‘shale gas’ – natural gas trapped within dense sedimentary rock formations or shale formations – has transformed domestic energy supply, with a potentially inexpensive and abundant new source of fuel for the world’s largest energy consumer.

With the advent of hydraulic fracturing (or fracking) – a method used to extract natural gas by blasting underground rock formations with a mixture of water, sand and chemicals – shale gas production is now booming in the U.S. Coupled with sophisticated horizontal drilling equipment that can drill and extract gas from shale formations, the new technology is being hailed as a breakthrough in U.S. energy supplies, playing a key role in boosting domestic natural gas reserves.

As a result, once faced with a looming deficit, natural gas is now available in abundance.

Growing Demand Supply Imbalance Pressurizes Price

While October becomes the tenth consecutive record-breaking month of 2014 in terms of natural gas output, the commodity’s demand has failed to keep pace with this rapid supply surge. Industrial requirement has been lackluster over the past two years with demand rising by a meager 0.5 Bcf per day in both 2012 and 2013.

The result? Prices continue to suffer.

Though natural gas has staged a decent rally over the last few weeks on speculation of strong heating demand in key U.S. markets due to chilly early winter weather, they still remain way off earlier highs.

From a peak of about $13.50 per million British thermal units (MMBtu) in 2008 to around $4.35 now – sinking in between to a 10-year low of under $2 in 2012 – the plummeting value of natural gas represents a decline of around 70% over six years. In the absence of major production cuts, we do not expect much upside in gas prices in the near term.

Limited Upside for ‘Gassy’ Companies

This translates into limited upside for natural gas-weighted companies like Chesapeake Energy Corp. (CHK - Analyst Report), Cabot Oil & Gas Corp. (COG -Analyst Report), and EOG Resources Inc. (EOG - Analyst Report). Their Zacks Rank #3 (Hold) also indicates that investors should wait for a better entry point before accumulating shares. In particular, companies with Zacks Rank #4 (Sell) or Zacks Rank #5 (Strong Sell) like Quicksilver Resources Inc. (KWK - Analyst Report), Ultra Petroleum Corp. (UPL - Analyst Report), and Range Resources Corp. look to be in the most trouble.

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