Will Falling Rig Counts Drive A Sustained Drop In Natural Gas Production?

In a new report, analysts at Citi looked at whether falling rig counts will lead to a sustainable drop in natural gas production. Analysts believe that production levels will likely remain high for a number of reasons.

The Numbers

Total oil and gas rig counts have fallen by 42 percent from peak numbers in October 2014. However, because producers are shutting down the least productive and least efficient rigs first, production levels have continued to rise.

Related Link: U.S. Oil Fund Rallies With The Rest Of The Market

New Pipelines

New pipelines in the Northeast could boost gas production numbers in the second half of 2015. Analysts note a large number of drilled-but-not-completed wells in the region.

Production Decreases Only Temporary

Analysts point out that the decision to shut down rigs is easily reversed, and any significant rebound in prices will likely be met by an increase in rig counts and production.

Compared to drilling new wells, re-starting offline rigs is cheap and simple.

"Surprise" Production Growth

Analysts fear that locations such as Haynesville and Midcon could be sources of unanticipated gas production growth in the next couple of years.

Outside of gas production in the Northeast and output associated with oil production, analysts predict that Haynesville production could rise as much as 0.5 Bcf/d in 2015 and 0.8 Bcf/d in 2016.

Outlook

Overall, analysts are forecasting at least a 4.0 Bcf/d increase in North American gas production in 2015 and a 1.5 Bcf/d increase in 2016, but they caution that there is upside risk to those estimates.

Shares of the U.S. Oil Fund ETF USO and U.S. Natural Gas Fund ETF UNG are down 55 percent and 42 percent respectively in the past year.

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