The Guest Blog

Schork Oil Outlook: Market Missing NatGas Rig Shortage?


No concern about the availability of natural gas — what gives?

On a less positive note, contacts in the energy industry said the moratorium on deepwater drilling resulted in significant regional layoffs, although energy service companies were shifting Gulf Coast workers to land or shallow water projects when possible.”

- The Beige Book, July 28, 2010,
The Federal Reserve Board – Dallas District

Indeed. For the week ended April 16th, i.e., the week prior to Deepwater Horizon, the Baker Hughes offshore rig count stood at a 61-week high, 56. The bulk of these rigs, 47, were located off the coast of Louisiana. However, with the U.S.’ boot firmly planted on the neck of the industry, the rig count has since fallen off of the proverbial cliff.

As of last Friday, the offshore count was 20 or less than a quarter of the 10-year average. Whereas the onshore rig count has increased by 14% since Deepwater Horizon, the offshore count has plunged by 64%.

Louisiana currently enjoys an unemployment rate that is 230 bps below the national average… but how long will that last? Net rig counts in Louisiana are down by 14% since April. Meanwhile, last Monday Dow Jones ran a story that recently released documents from the Justice Department (as part of ongoing litigation in New Orleans over the moratorium), U.S. officials estimated that nearly 9,500 jobs in the oil and gas industry and more than 13,500 jobs in ancillary industries would be lost as a result of the ban on deepwater drilling.

Stephen Schork

While a significant number of well-paying jobs hang in the balance, the oil and gas industry continues to focus more on the former and less on the latter. That is to say, the emphasis in drilling continues to skew away from gas and towards crude oil. Since Deepwater alone, oil rigs have increased by 29% while gas rigs are up by 1%.

Despite this shift away from gas, the futures curve on the Nymex is showing little concern with regard to the availability of gas this winter… despite one of the lowest summer injection seasons in recent memory. To wit, since the start of the month gas for delivery this winter has shifted from a 13 cent premium (backwardation) over next summer, to a 14½ cent discount (contango)!

Why is the market not concerned regarding the meager increase in gas rigs? Analysts at suggest that it is likely because horizontal gas rigs (those associated with shale drilling) are up by 7%, while vertical rigs are down by 13%. As such, the next supply glut is only a couple of fracs away.


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