Analysis: Gas price rally could spur US drilling boost

OREANDA-NEWS. June 16, 2016. The recent rally in natural gas could boost drilling later this year as producers aim to take advantage of a tightening US market amid growing demand for the power plant fuel.

Prompt-month natural gas prices are trading near a nine-month high, settling yesterday at \\$2.604/mmBtu, on forecasts for hot weather, high demand from the power generation sector and recent government data showing sluggish injections into gas storage. That represents a 14pc increase this month.

The rally "is likely to push the gas rig count higher sooner than we initially envisioned as operators may be encouraged to add incremental activity," analysts with the energy investment bank Tudor Pickering Holt said. The surge in US gas prices has lifted to 2017-calendar strip above \\$3/mmBtu, where producers could lock in prices on future output and boost drilling by 2016 third quarter, the bank noted.

Increased drilling could push more gas into the US market, putting downward pressure on prices and derailing predictions that domestic output growth will flatten this year. The early signs of higher activity are already emerging.

Gas well completions for May have already picked up in Texas, the largest gas-producing state by volume. May gas well completions rose to 199, up by two-thirds from April but down slightly from 201 completions a year earlier, according to the most recent data from the Railroad Commission of Texas, the state agency that oversees oil and gas drilling.

In addition, the rig count in the Haynesville shale, a gas-bearing formation underlying east Texas and northern Louisiana, has increased for four of the last five weeks. The Haynesville rig count rose last week to 17, up by two from a week earlier and the highest since 29 January, Baker Hughes said.

Development of US gas fields like the Haynesville, which is close to growing gas demand in the southeast and on the Gulf coast, dwindled as an unusually mild winter weighed on gas demand, eventually pushing prices to a 17-year low in March below \\$1.65/mmBtu. Persistently low prices over the past year have caused large gas producers such as Southwestern Energy and Chesapeake to push rigs to the sidelines.

The gas rig count last week rose last week to 85, a three-rig increase from the prior week but a 62pc year-over-year decline.

Demand for gas from the power generation sector this year is forecast to hit record-highs of 27.9 Bcf/d, up by about 5pc from 2015, because of low gas prices and coal-plant retirements.

Prompt-month natural gas prices are above spot prices at the Henry Hub, indicating increased gas demand from electric utilities, the US Energy Information Administration said. Nymex settlement prices for July delivery have averaged \\$2.45/mmBtu, a 17?/mmBtu premium to the spot price. Prompt-month prices a year earlier were at a slight premium to the spot price.