RE:Rig count down -48
The plummeting rig count is quite favorable for NG as it’s mostly the oil directed side that’s dropping. Rigs chasing oil produce large volumes of associated NG that is simply dumped on the market driving prices down. Gas directed rigs on the other hand have been at historic lows now for quite some time.
OPEC’s sights are trained on oil, -not on NG, so in a subtle way, NG has been given its “get out of jail free card,” as it only requires one thing, -downward industry adjustment in the rig count to remove the glut. North America has the lowest NG prices in the world and there’s no global outside pressure gunning for NG like oil, so it’s possible that NG prices could rebound before oil does. Here’s why. If oil stays below 55.00 the oil rig count would continue to decline removing more associated gas from the market. And if the oil price comes back slowly that will prevent any dramatic rise in the rig count. I know it’s possible that some rigs could reappear on the gas directed side but so far that has not been the case; in fact, gas directed rigs sit at an all-time low (shale era) of 300 as of Feb.13th and down 56 since Nov 7th. But IMO we need to see another 300 rigs pulled out of production. The question is, how long will that take? I don’t think we can expect to see reductions in the rig count to proceed at the same clip as the previous 3 weeks but eventually a declining crude price will force the count lower, like it or not.
The shale revolution has altered the functionality of a portion of the old pipeline grid resulting in many bottlenecks and preventing crude from getting to refineries in a timely cost effective manner. Although not shale related, even the Keystone (political issue) is, in some respects, just another aspect of this problem. Improvements need to be made to keep the industry viable, but it will take time. Other regulatory restraints placed on the U.S oil market, - such as outdated laws prohibiting the shipment of crude out of the U.S. have also handcuffed the industry. In aggregate these factors prevent viable alternatives for the industry to blow off steam, (e.g. regain functionality) and so crude gets trapped in Cushing with no place to go and storage fast approaches its ceiling. More reason to pull back on the rig count and cap wells as full storage becomes just another huge negative for oil prices. Besides, most of the rigs pulled out of production have been the least efficient ones. The time to do some serious culling of the others is near at hand.