I've been writing about the Baker Hughes (BHI) rig count data every Friday, and I -- and the market -- focus most on the component of BHI's data that focuses on U.S.-based oil-seeking rigs.
That figure was 594 this week, down one from last week, another bullish data point for oil prices, especially viewed through the prism of a 1,001-rig decline in that count on a year-on-year basis.
Baker Hughes also measures natural gas rigs in use, and the trends there are startling. It's easy for NatGas to fall in the shadow of its big brother, Crude, but what's happening in natural gas drilling is a hugely important bellwether for the U.S. Economy. And the rig count figures are awful.
This week, BHI counted 193 natural gas rigs in operation, up one from last week's figure, but down from the year-ago figure of 332. That data point alone obviously doesn't tell the whole story.
A picture is indeed worth a thousand words, and this excellent graphic from Greg Barnett and his team at EnerCom is a jaw-dropper. The key is to focus on the bottom-right of the chart: natural gas rigs in use in the Appalachian region.
That figure has fallen dramatically thus far in 2015, following the decline in natural gas futures prices. Front-month NatGas futures fell below $2.30 today, hitting their lowest level since 2012.
The symmetry can be seen in the rig count figures. A year ago there were a combined total of 130 rigs operating in the Marcellus and Utica shales. This week that figure is 65.
The Appalachian has been North America's single-hottest shale play, and it's mostly gassy. So, declines in natural gas prices have hit folks whose incomes depend on exploration and production in Ohio, Pennsylvania and West Virginia, just as much as those who depend on oil drilling in Oklahoma, Texas and North Dakota.
As with the sharp decline in active rigs dedicated to oil, I believe the fall-off in natural gas rigs in use is showing us a bottom in natural gas prices. But that bottom is much lower than I -- or any of the natural gas E&P CEOs I speak with at the many energy conferences I attend -- would have guessed this summer.
And that's where the investor should be making a read-through. Oil prices are driven by a crazy concoction of Middle Eastern politics (and geopolitics, especially when it comes to Iran), oil giants' massive hedge books and demand that is clearly increasing, although because crude oil needs to be refined before use, it's always difficult to determine inventory-stocking versus real end-user demand.
Natural gas has no such complicating issues. According to U.S. Energy Information Administration figures, in the U.S. we export less than 6% of the natural gas we produce, and, if we exclude Canada, the amount of importation is far less than 1% of domestic production. So, natural gas is very close to a "fully domestic" industry, and the decline in natural gas prices should be driving home one key point:
- America's industrial economy is not strong.
We should also gather that from the Atlanta Fed's GDPNow tool, which is estimating a third-quarter GDP growth figure of 0.9%.
There's just no other key takeaway. Low natural gas prices do not equal a strong economy.
Adding to the backdrop of doom and gloom among gas-focused E&Ps have been efforts by short-sellers to put several producers out of business. As we've seen with oil, the same hedge funds that short the futures contracts can short the equities of the producers. I am dealing with this with core holding Magnum Hunter Resources (MHR), and let me tell you it's not always fun.
Capacity is coming out of the system, though, with the most extreme example being the recent decision by Stone Energy (SGY) to shut-in gas production at its Mary field in West Virginia
I'd love it if there were more industrial demand, and obviously the weather is a factor as well. Things are getting chillier here in the Northeast this weekend, so maybe that's a step in the right direction for natural gas prices. Ultimately, though. It's going to be the supply side that drives natural gas prices, and the rig count figures give me confidence that the market is finding a bottom in natural gas prices, just as I believe it is with oil prices.