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Schork Oil Outlook: The NatGas Danger Now

Drill, baby, drill?

“Reports indicate that oil and gas output was mainly steady during the past six weeks, with output expected to remain at current levels in the near term. Companies not participating in Marcellus shale drilling, a largely untapped natural gas reserve, see the industry slowing down during the next several months due to slumping gas prices. Nonetheless, some gas producers reported increasing their capital outlays for additional drilling [emphasis ours]."
- Federal Reserve Bank Beige Book
October 20, 2010

“Through development activities to date in the Marcellus and Eagleford shale plays in the U.S. onshore, Anadarko now estimates its acreage positions in these two fields hold a total of approximately 1.5 billion BOE of net risked captured resources. The positive results to date provide additional assurance that the company can attain a 60 percent compounded annual production growth rate over the next five years from these shale assets.”
- Anadarko Third-Quarter 2010 Highlights
November 1, 2010

Despite reports — too numerous even for that Chinese supercomputer (Tianhe-1) to tally — U.S. gas producers have not given up on drilling. Thus, whether we are talking about anecdotes from the Fed or earnings statements from one of the largest gas producers in U.S., the bottom line is clear; sub $4 natural gas is not low enough to stem onshore production, i.e., shale.

"These rigs now account for two-in-three employed in the U.S." -The Schork Report, Stephen Schork

According to the EIA’s 914-Survey, natural gas production in the Lower 48 U.S. increased by 1.8% to a record 65.79 Bcf/day in August. Meanwhile, per the latest update from Baker Hughes, for the four weeks ended October 08th, natural gas rigs were down by 39% from the peak in September 2008. However, a near 80% decline in the number of vertical rigs accounted for the overwhelming bulk of this decline. On the other hand, horizontal rigs (those most associated with shale production) increased by 28%.

As such, the share of horizontal rigs to the overall count has more than doubled in two years. These rigs now account for two-in-three employed in the U.S.

Bottom line, until we see a pullback in onshore output (i.e. horizontal rigs), analysts at The Schork Report advise clients to be wary about owning gas.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.