Correlation between front-month natural gas futures (i.e. Henry Hub) and rigs drilling for natural gas is a positive 0.84 over the last fifteen years. Although the negative drum has been pounded repeatedly concerning the oversupply of natural gas, factors do exist that could lead to improving natural gas prices. Catalysts that could drive natural gas prices higher include Colorado State's announcement that they had recently upwardly revised their forecast for 2010 hurricanes to 10 (due to warmer water conditions between the Lesser Antilles and the west coast of Africa) and the Interior Department's handling of offshore drilling in the wake of the oil spill that effectively slows the permitting of shallow water drilling and bans drilling at depths greater than 500' until a later date to be determined. Both factors could limit future supplies and thus lead to a better pricing environment for natural gas. The impact from the drilling ban in deeper waters has already shown up in the most recent weekly rig count from Baker Hughes.
The United States Rotary Rig Count for land and inland water drilling as reported by Baker Hughes stood at 1482 as of June 4, 2010 (excludes offshore rigs); down 5 rigs from the previous week's count. Collectively the states Texas (-8), Wyoming (-4), Oklahoma (-3), Kansas (-2), Alaska (-2), Colorado (-2), and Lousiana (-1) had a week-to-week decline of 22 rigs that were somewhat offset by a gain of 17 rigs spread across the remaining states. North Dakota saw the most improvement over the prior week advancing 8 rigs or 8% to 113 and accounted for nearly half of the offsetting amount. The key take-away from this chart in our opinion is that the oil rig count in the US is greater than the previous peak.
Backing out 13 rigs that were operating in the U.S. Inland Waters leaves 1,469 operating exclusively on land. The split between land rigs drilling for oil and natural gas is 36%/64% or 536 and 933 rigs, respectively. The percentage of rigs drilling for natural gas peaked in June 2005 at 89%. We would note that the number of rigs drilling for oil was near trough levels during this period. Since this time the rig count drilling for oil has grown 288% while the natural gas rig count has fallen 16%. Interestingly, EIA-914 data from the most recent month reported, March 2010, shows that marketed gas production is up 14% to 62.1Bcf/day versus March 2005 levels (underscoring the significant contribution that shale play growth is having on gas production).
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