Over the past few years, US onshore natural gas and oil drilling have grown substantially, largely tied to developments in shale oil and gas. And this increased drilling activity has shown itself clearly in the number of active drilling rigs at work in the US (see Exhibit 1).
Exhibit 1: US Rig Count
Source: Baker Hughes, Thomson Reuters, as of 4/4/2012.
You may notice the flattening total in recent months. In fact, the count began to flatten around October 2011. But behind this flattening seemingly stands falling natural gas rig counts and rising oil rig counts—likely influenced by cheap gas prices and higher oil prices.
While many investors seem focused on elevated oil prices and their potential effects on consumers, the reality is prices are equally a signal to producers. In this case, the signal elevated oil prices seem to be sending is to shift drilling activity toward oil, as the increased prices reflect greater profitability.
A similar yet opposite effect is occurring in natural gas, where US prices this week fell below $2 per million BTUs—levels not seen in over a decade. The effect here? Less production as low prices driven by massive gas stockpiles make production less profitable.
So while our graph may not show oil or gas prices themselves, prices’ effects—and how they affect producers’ willingness to drill—are clear.