THE WALL STREET JOURNAL

 

March 28, 2014, 5:55 PM ET
Where Will Natural Gas Prices Go? Look to the Rigs
ByTim Puko

 

Natural-gas traders are returning to a neglected data point to predict where prices will head
next: the weekly rig count.


The count — a survey of the number of rigs drilling for gas released each Friday by oilfield
services firm Baker Hughes Inc. — is key to estimating U.S. production. This winter, the rig
count played second fiddle to weather reports, as freezing temperatures sent gas demand —
and prices — sharply higher.


But now, with gas stockpiles at an 11-year low, the count is a key part of the analyst’s arsenal
once again. Gas producers typically replenish inventories each spring, when mild temperatures
keep demand down. If producers can’t refill storage by next winter, gas prices could rise. Gas
for May delivery ended Friday at $4.485, up 4% this week though down from above $6 in
February.


This Friday’s Baker Hughes count shows gas drillers operated 318 rigs, compared to 326 a
week earlier and 389 a year ago.


That’s a concern for some traders who question whether drillers can replenish supplies by
November, when heating demand begins to pick up. The country would need to see a 10 to 15
percent increase in rigs operating this summer to get storage levels to 3.9 trillion cubic feet of
natural gas by November, about where it’s been entering previous winters, said Kevin Petak,
vice president of fuel markets analysis for ICF International Inc. The U.S. Energy Information
Administration reported 896 bcf in stockpile as of Thursday.


“If we don’t see an increase in rigs it’s only going to lead to more reasons for higher prices,”
analyst Jim Ritterbusch said.


Others are watching rig counts for the opposite reason. If producers see prices at above $4.50
as a reason to jump back into less profitable gas drilling areas like the Haynesville and
Fayetteville shales, it could lead to a supply glut, said Ryan Smith, energy analyst with Bentek
Energy in Denver.


“We’re watching [the count] very closely,” Mr. Smith said.


The rig count isn’t the only factor at play in the gas market. A mild summer and high energy
prices could dampen consumer demand. Bentek and ICF think about 3.6 trillion cubic feet will
be enough to avoid a price spike next winter.


Technology has also vastly improved what each rig can produce, so fewer rigs may be needed.
There’s also still a backlog of previously drilled wells waiting to come online. New pipelines in
the northeast could lead to an additional 1.5 billion cubic feet per day of gas coming onto the
market between April and November even without any other rigs going into the ground, Mr.
Smith said.


“Every rig does matter, especially with the amount of production brought online for each well
drilled,” Mr. Petak said. “Having said that, I think watching the rig count is only one part of the
puzzle, so to speak.”


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