Energy Update | April 20th, 2020
Extraordinary Decline of OIL and Gas Rigs is Accelerating, Increasing Probability of Higher Natural Gas Prices. https://youtu.be/aHVq-SPWUAI In my April
Extraordinary Decline of OIL and Gas Rigs is Accelerating, Increasing Probability of Higher Natural Gas Prices. https://youtu.be/aHVq-SPWUAI In my April
In my April 13th Energy Update, I said evidence for much higher prices by the end of the year was becoming more apparent with active Oil and Gas rig counts plunging and the Natural Gas forward market already anticipating higher prices by the end of the year. The sharp decline in Oil and Gas rigs will undoubtably result in much lower production and in the 2 charts below, I pointed out Natural Gas’s forward market was already rallying as it anticipated a precipitous decline in Natural Gas production.
The first chart was the nearby Natural Gas futures contract:
Even with the lowest inflation adjusted prices since 1990, the nearby contract had not made headway since the end of February, but as you can see in the next chart this was not the case with the December contract:
The anticipated precipitous decline of Natural Gas production due to the collapse of Oil & Gas rigs triggered a sharp rally in the December contract to $2.80 per MMBtu. The forward market was already anticipating higher prices by the end of the year, and based on what happened in 2012 & 2016, I said prices would likely approach $4.00, it not higher.
Today’s report will continue to focus on the number of active Oil and Gas rigs and their impact on Natural Gas production.
In my April 13th Energy Update, I said Oil and Gas rigs had declined since the end of 2019, and the decline accelerated over the previous 2 weeks with active Oil rigs declining 19.2% and 39.5% year-over-year.
I pointed out It was important to understand the impact of Oil rig declines on Natural Gas production. A byproduct of Oil rigs is the production of associated Gas, and since associated Gas accounts for approximately 40% of Natural Gas production, a significant drop in active Oil rigs would result in much lower Natural Gas production.
The question is, has the decline in Oil and Gas rigs begun to slow or are they continuing to decline?
The answer is the decline has not slowed; it is accelerating!
On Friday, April 17th, Baker Hughes reported a decline of 66 Oil rigs to 438 active rigs, a decline of 29.8% over the last 3 weeks and 46.9% year-over-year. To make matters worse the decline of Natural Gas rigs also accelerated with a loss of 7 more rigs and we now have only 89 active Natural Gas rigs down 52.4% year-over-year!
This decline in Oil and Gas Rigs in such a short period of time is unprecedented and its ramifications are difficult to fully anticipate. But if history is a guide, then it is highly probable Natural Gas prices will be significantly higher by the end of the year.
Remember, in 2012, Natural Gas closed the winter heating season with supplies 49% above the 5-year average and production was expected to increase substantially with fracking coming fully online, but as you can see in the chart below, Natural Gas prices still approached $4.00 per MMBtu by the end of the year
This year we closed the winter heating season with supplies 17% above the 5-year average, not 49% above, and the unprecedented collapse of Oil and Gas rigs is expected to greatly decrease production, not increase production; therefore, where do you believe Natural Gas prices will be by the end of this year?
Over many years of trading, I learned past performance does not guarantee future results, but if you believe, as I do, the empirical evidence strongly supports the likelihood prices will be much higher by the end of this year, then if you have not already locked in today’s low rates, you will not make the same mistake of those who hesitated in 2012. The upside risk is too great to justify waiting hoping for slightly lower prices.
Not every client’s risk tolerance and hedging strategy is the same, but the above report will help you put into perspective the risk/reward opportunities. I invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.
Ray Franklin
Energy Professionals
Senior Commodity Analyst
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