Why falling temperatures won’t mean rising natural gas prices |
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13 Dec 2011 |
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If you are looking to source FactSet data or analytics in your publication, e-mail media_requests@factset.com. The number of active drilling rigs in the United States is primarily driven by energy prices; thus, is it no surprise that surging oil prices are propelling the U.S. rig count to new highs. Since bottoming out in December 2008 at $30 per barrel, the WTI oil price has been rising steadily, currently hovering around $100 per barrel. As a result, the U.S. rig count is near the highs reached just after energy prices spiked in mid-2008, according to weekly data published by Baker Hughes Inc. The surge in rigs makes sense given the behavior of oil prices, but the more interesting story is what has been happening with natural gas drilling and prices. U.S. rigs totaled 1,987 in the week ended December 9, down 2% from the high reached in early November but still up 15% from a year ago. However, the breakdown between oil and natural gas rigs paints a very different picture. The number of natural gas rigs is up from the trough in August following the collapse of energy prices, but rigs have been relatively flat for the past two years, and the natural gas rig count is down for this year. In fact, oil rigs outnumber gas rigs for the first time since 1995 as the growth in oil rigs has outpaced the decline in natural gas rigs.
Normally, this decline in rigs would be a bullish sign for natural gas markets. But while oil prices are back to new highs, Henry Hub natural gas prices are hovering around $3.30-3.40/Mmbtu, a full $10 below the 2008 peak and not too much higher than the 2009 trough of $1.92/Mmbtu.
While global oil prices are impacted largely by global political and economic events, natural gas prices are mostly driven by domestic supply and weather.
In particular, natural gas producers have been taking advance of some recent technological advances that have dramatically increased productivity. These advances include horizontal drilling and hydraulic fracturing (“fracking”)— technologies that allow drillers to more easily extract natural gas out of shale rock. Oil drilling has also benefited from this technology, but with the importance of non-supply factors in oil prices, the main price impact has been on natural gas. A cold winter and a sudden resurgence of economic growth could begin to put upward pressure on natural gas prices, but robust supplies will continue to suppress prices for the foreseeable future. |
