Common sense dictates that whencommodity prices fall, there will
be less financial incentive to dig stuff up. And when prices cross
below levels where producers can turn aprofit , activity should
really grind down.
That's when it pays to go bottom-fishing. Because when demand
inevitably picks back up, you'll be among the first to profit.
Baker Hughes (
, which keeps a running tally of the number of drilling rigs in
operation, we can verify that this exact scenario is playing out in
the natural gasmarket .
As of Sept. 21, there were 1,859 oil and gas rigs operating in U.S.
energy basins. That's well below the peak of 2,031 set in September
2008, but more than double the trough of just 876 from the summer
The number of rigs hunting specifically for natural gas has
plummeted to just 454.
With just about every energy producer in the country abandoning dry
gas fields such as Louisiana's Haynesville Shale in favor of oilier
plays, the number of oil rigs in operation has surged to near a
25-year high of 1,402.
I cover at least a couple dozen North American energy companies in
Scarcity & Real Wealth
newsletter, and pretty much all of them are shifting from gas to
liquids to chase higher prices. This has been going on since the
beginning of the year.
Chesapeake Energy (
, whose drilling successes helped cause the very glut that sent
prices tumbling, slashed its gas exploration budget by 70% back in
January and reduced the number of gas rigs to 25 from 75.
It's not alone.
Magnum Hunter (
, for example, is directing at least 92% of this year's planned
capital expenditures to oil.
Add it all up, and it's easy to see why gas-directed rig counts are
testing new lows. The number of active gas rigs has plummeted 70%
from the high-water mark of 1,606 reached in the summer of 2008.
But here's where it gets interesting...
You might think that a 70% drop in drilling activity would severely
clamp down on natural gas output. But that's not the case. In fact,
the U.S. Energy Information Administration believes that U.S.
production will climb 4.2% this year from last year's record pace
of 66.2 billion cubic feet per day.
Part of the reason is that vertical drilling rigs are being
replaced by horizontal rigs, which unit-for-unit tend to bring up
much more gas. There's also the fact that even in so-called oil
shales, natural gas can still bubble up along with crude.
, for example, reports that two-thirds of its gas is associated
with liquids production.
What this means for investors...
It's quiet enough to hear crickets chirping in most dry gas
basins right now. Rigs and equipment have been moved elsewhere.
Leasing agents have skipped town. Wells have been left unfinished
and pipelines unconnected.
That may not be enough to lower production, but at the very least
it's slowing the increase. In the meantime, Chesapeake and
ConocoPhillips (among others) have also decided to voluntarily
curtail production by over a billion cubic feet per day.
That is also mopping up some of the excess supply.
These moves, along with briskly rising demand from power
generators, petrochemical makers and other users, should help
slowly bring the market back into balance.
Action to Take -->
My calls for a natural gas rebound earlier this year were a bit
premature. But we're finally starting to see a rally.
After sinking to $1.90 per Mcf a few months ago, natural gas prices
have jumped more than 70%. However, they could double from here and
still be cheap in historical terms.
That's why it's so important that you start looking at ways to
profit from natural gas right now. I think we'll see natural gas
retake $4 per Mcf by the end of 2013, and by then, you should be
positioned for a sustained boom in this sector.
-- Nathan Slaughter
P.S. -- Although he is an expert in the area, oil and gas is far
from the only arena Nathan is profiting from. Scarcity & Real
Wealth aims to profit from the rarest and most valuable assets on
the planet -- precious metals, agricultural commodities, energy,
and other natural resources. These critical inputs are in short
supply, yet worldwide demand is on the rise, making these assets
some of the best investments on Earth. You can learn about one
important supply/demand imbalance Nathan has found that will be
making headlines next year by visiting this link (and without
having to watch a lengthy video).
Nathan Slaughter owns shares of CHK.StreetAuthority LLC owns
shares of CHK in one or more if its "real money" portfolios.