The retrenchment in drilling for US oil is threatening to leave a different market short: natural gas.
“The impacts of oil rig counts extend beyond oil: the outlook for US. natural gas is critically dependent on the outcome of this balancing act in US oil rigs,” said Anthony Yuen, a strategist at Citigroup in New York, in a report to clients Wednesday.
“If the oil market remains oversupplied and oil-rig counts fall, the decline in associated gas production would leave the market short of gas.”
Associated gas is the gas that comes out of oil wells along with the crude.
Supplies of this byproduct from fields including the Bakken formation in North Dakota and the Eagle Ford in Texas may fall by about 1 billion cubic feet a day next year as drillers idle rigs in response to the collapse in oil prices. That’s about 7% of US residential gas demand.
The US Energy Information Administration has already forecast that shale gas production will drop in October for the fourth straight month, a record streak of declines.
US oil has lost half its value in the past year amid a worldwide glut of crude. Drillers have responded by sidelining almost 60% of the country’s oil rigs since October last year.
Crude producers in the lower 48 states may have to keep the number of working rigs low for a while longer to balance the global market, Yuen said. A recovery in the rig count may “exacerbate the current oversupplied environment” and weaken prices, he said.
West Texas Intermediate crude futures gained $2.56 a barrel on Wednesday to settle at $47.15 on the New York Mercantile Exchange. Prices have fallen 50% in the last year.
Gas futures settled at $2.66 per million British thermal units on the New York Mercantile Exchange on Wednesday, down 41% from June 20, 2014, when oil prices peaked last year. The number of gas rigs drilling in the U.S. has fallen 45 percent since Nov. 7, reaching a record low in Baker Hughes Inc. data going back to 1987.