Adding Insult to Injury for North America's Oil Industry

Updated January 2, 2016

While the markets focus on oil prices, oil producers in North America are suffering from low prices in another of their commodities, natural gas.

Here is a chart from the U.S. Energy Information Administration showing what has happened to spot natural gas prices at the Henry Hub since 1997:

Here is a more detailed chart showing what has happened to natural gas prices on the NYMEX over the past three months:

Since mid-September, natural gas prices have dropped from just under $2.90 per Mcf to just over $2.33 per Mcf, a decline of 19.7 percent.  This is highly unusual given that we are heading into heating season but not terribly surprising given the drop in oil prices.

According to the EIA, during the week up to December 18, 2015, natural gas gross production in the United States was down 0.3 percent on a year-over-year basis with Canadian imports down 13.4 percent on a year-over-year basis.  LNG imports, on the other hand, were up 45.72 percent on a year-over-year basis in the week ending December 6, 2015.  Natural gas in storage dropped by 34 BCF to 3846 BCF as of Friday December 11, however, storage levels are still 16 percent (541 BCF) above the level a year ago and 9 percent (322 BCF) above the five year average from 2010 to 2014 for this week.  Here is a graphic showing the oversupply situation in 2015 as compared to both 2013 and 2014:

Here is a graphic showing the annual supply-demand balance:

The buildup of supply from March 2015 onward is quite apparent.  Consumption was down 3 percent when compared the same week in 2014.

Obviously, such an oversupply situation has had an impact on the weekly natural gas rig count as shown on this graphic:

You can see the very close relationship between natural gas prices and the rig count over the past nine years.  For the week ending Friday, December 11, the total natural gas and oil rig count fell by 28 units to 709 units, the lowest combined oil rig count since September 1999!  Here is a table showing the rig count by both product and type:

This final graphic shows us exactly why the oil industry has a problem with natural gas prices:

U.S. shale gas production has risen from 2.17 BCF per day at the beginning of 2000 to 41.778 BCF per day in November 2015.  Despite low prices over the past year, shale gas production rates have shown very slight declines, falling marginally from a peak of 42.475 BCF in June 2015.

With early December temperatures being 3 degrees warmer than the average for the same week over the last thirty years, unless unseasonably cold weather takes place over the next two months, it is unlikely that natural gas prices will experience upward pressure, adding insult to injury for the nation's beleaguered oil industry.