Entering 2008, U.S. gas prices could rebound to a 7:1 or even 6:1 ratio with crude oil, depending on the weather, according to analysts at Raymond James & Associates Inc. So $70 oil could mean $10 gas or better. For this bullishness on prices, thank Raymond James’ pessimism about the exploration and production (E&P) industry’s ability to grow production.
While 2Q2007 saw a 1.5% sequential and a 2.2% year-over-year increase in domestic gas production, essentially all of the growth was due to the rebound in production following hurricane-related deferrals in 2006, the firm said. Correcting for hurricanes — which Raymond James admitted is an imprecise exercise — yields production that was down 0.1% year-over-year, the fourth consecutive decline.
Raymond James said it is important to recognize that even the nominal 2.2% year-over-year increase is modest given the 20%-plus increase in the gas-directed rig count over the last 24 months. “Since this year’s growth in rig activity is likely to be slower, underlying production declines should steepen by the end of 2007, shifting the market’s perception about U.S. gas supply and providing added support to drive gas prices higher heading into 2008.
“This decline appears to mirror the organic declines that have characterized U.S. gas production during 2002-2005. More importantly, all these declines have come amid virtually 100% utilization of onshore gas rigs, along with significant gains in rig counts and drilling efficiencies over the past five years.”
Despite E&P capital budgets that suggest further growth in 2007 drilling activity, the huge drilling growth rates of 2005 and 2006 are not likely to be repeated this year, Raymond James said. Additionally, efficiency gains should gradually slow while field decline rates continue to trend higher and the overall quality of prospects continues to diminish.
“All-in, we believe that these factors will cause the U.S. gas supply picture to deteriorate over the coming year,” Raymond James said. “Today’s gas story is much like the 1970s oil story, when U.S. oil production continued to stagnate despite greater and greater numbers of active drilling rigs.”
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