Ramifications of Record Low Rig Count

I am writing this report as a follow-up to my March 7^th report, which covered 2 factors supporting my belief a major bottom in Natural Gas is in place, and although prices could go slightly lower near-term, it is highly likely the average price of Natural Gas will be significantly higher over the next 12, 24 & 36 months.

The first factor discussed in my last report, was over the last 20 years when prices were near present levels, weaker companies did not survive, and the ones who survived decreased production leading to higher prices. If this is taking place today, it would be reflected by an historically large decrease in active U.S. rigs drilling for Crude Oil and Natural Gas.

In this report, I point out this is in fact taking place, and explain why based on past performance prices are primed to move higher!

Last week, the number of active U.S. rigs drilling for Crude Oil and Natural Gas fell by 9 to reach a record-low of 480. The previous record low of 488 was reached in April 1999. The chart below shows what happened the last time the Oil and Gas rig count dropped to near the present level:

As you can see in the above chart, when we reached the old record of 488 active Oil and Gas rigs early in 1999, Natural Gas prices were much higher the following 18-months. It is also important to note as shown by the red line, the lows for Natural Gas early in 1999 and thus far early in 2016 are virtually the same.

Therefore, with the number of active Oil and Gas rigs reaching a new low of 480 active rigs last week, and with Natural Gas prices testing the price lows reached early in 1999, where will prices likely be 18-months from now?

Although past performance does not guarantee future results, the evidence supporting Natural Gas and Electricity rates moving substantially higher from present levels is compelling. This report focuses on Natural Gas rates, but my analysis also pertains to Electricity. Natural Gas is now the largest source of energy for the generation of Electricity in many regions; therefore, Natural Gas and Electricity rates are highly correlated.

Not every client’s risk tolerance and hedging strategy is the same, but we trust the above report will help you put into perspective the risk/reward opportunities at this time. I invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.

Ray Franklin
Senior Commodity Analyst
727-400-3170