As of September 18, Baker Hughes Incorporated reports 293 rigs drilling for oil and 705 rigs drilling for natural gas. The current oil rig count reflects a 64 percent increase from the lowest 2009 level reached in early-June, while the natural gas rig count is only 6 percent above its mid-July level (Figure 1). Rigs drilling for oil now account for 29 percent of the total, up from 21 percent at the beginning of the year. Despite the uptick in oil drilling, both oil and natural gas rig counts remain substantially below their peak levels in 2008.

Figure

Price developments are undoubtedly an important driver of the difference between recent trends in oil and natural gas drilling activity. Historically, drilling for both resources has followed price changes, though with some lag. (See Figure 2 for oil and Figure 3 for natural gas.) The relationship appears weaker for natural gas partly because natural gas prices often respond more strongly to temporary disturbances like cold snaps or hurricanes. Oil prices reached a low for the year of $34.03 per barrel in February 2009, and have since rebounded to about $70 per barrel. Oil rig counts began growing again 4 months later, and have since followed a similar trajectory to the price changes.

Figure

Figure

By contrast, current natural gas prices have remained mostly subdued and reflect apparently ample supplies. For months, natural gas storage has been at seasonal record highs. Under these conditions, there is little impetus to increase drilling. Supplies of natural gas remain high partly because natural gas production remained relatively stable, despite the downturn in drilling activity that has now lasted for a considerable period. Notably, new production from shale resources continues to grow. Several factors may help explain this apparent delay in a production response to lower drilling:

  • There is a lag between falling rig counts and falling production, as the abundance of new wells from previous high rig counts are completed and enter the market.
  • Since the drop in rig count began, operators have been drilling primarily in the most attractive areas, so any fall in production would normally be less than proportional to the fall in drilling.
  • At lower rig counts, drilling becomes increasingly efficient. Only the most efficient rigs and crews continue to operate. For example, operators have increasingly focused on drilling horizontal wells, which take longer to drill but are much more productive than vertical wells in shale and other tight formations (Figure 4). From the beginning of June to September 18, the number of horizontal rigs has risen 16 percent, and they now make up about 40 percent of the total rig count.

Figure

Going forward, it is possible that natural gas rig counts may follow a different pattern from that seen in previous cycles when natural gas prices rise. Some efficiency gains will likely continue to lead to greater production for the same rig count. Moreover, with the increasing use of hydraulic fracturing, operators can increase production in the short-term not only by drilling new wells, but also by refracturing wells that have already been drilled or by finishing the fracturing of wells that were only partially fractured when first drilled. This could dampen price volatility somewhat, but the actual effect will become clearer only after prices begin to signal the need for increased production.

Note: Baker Hughes Incorporated is a Houston-based oil services company. For over 60 years, it and its predecessors have provided rotary rig counts. The counts are an indicator of exploration and development activity.

Gasoline Price Falls for Sixth Consecutive Week
For the sixth week in a row, the U.S. average price for regular gasoline decreased. The average dipped two and a half cents to $2.55 per gallon, bringing the cumulative drop for the past six weeks to nearly 10 cents. The national average was $1.17 less than a year ago as prices fell in all regions of the country. On the East Coast, the average price fell four cents to $2.50 per gallon. In the Midwest, the average slipped two cents to $2.45 per gallon. The average price on the Gulf Coast remained the lowest of any region, dropping two cents to $2.36 per gallon. In the Rocky Mountains, the average dropped nearly two cents to $2.57 per gallon. The price on the West Coast declined for the first time since August 24, dropping a penny to $3.03 per gallon. The price in California also fell a penny, to $3.14 per gallon.

The national average price for diesel declined for the third straight week, dropping over a penny to $2.62 per gallon, $1.34 below the price a year ago. Prices drifted down somewhat in all regions of the country. On the East Coast, the average dipped two cents to $2.63 per gallon, while the Midwest price slipped a penny to $2.60 per gallon. At $2.54 per gallon, a penny below last week, the average along the Gulf Coast remained the lowest of any region. The price in the Rocky Mountains was essentially unchanged at $2.68 per gallon. On the West Coast, the average dipped a penny to $2.78 per gallon and the California price moved down two cents to $2.83 per gallon.

Propane Stocks Resume Build
Inventories of propane gained across most regions last week bringing total U.S. inventories to over 72.0 million barrels. The Midwest region realized the largest gain with a 0.6 million barrel increase. The Gulf Coast region added 0.4 million barrels and the Rocky Mountain/West Coast region added 0.4 million barrels. The East Coast region drew from its inventories slightly. Propylene non-fuel use inventories increased their share of total propane/propylene inventories to 2.9 percent.

Text from the previous editions of This Week In Petroleum is now accessible through a link at the top right-hand corner of this page.