U.S. energy producers are sticking with oil over natural gas, boosting Goldman Sachs Group Inc.’s view that gas at a six-year high may still have room to rally.
Drillers switched their focus to oil in 2012, when gas futures dropped to a decade low. While gas has more than doubled since then, surging this year as frigid weather eroded stockpiles, crude remains more profitable, according to Loomis, Sayles & Co., which manages $200 billion.
Goldman Sachs said this month that gas may have to trade between $5.75 and $6.50 per million British thermal units to spur a supply increase, up at least 19 percent from current prices. Chesapeake Energy Corp., the second-largest U.S. gas producer, estimated that its output in 2014 will grow at half the rate of the company’s oil production.
“You need either $6 gas or oil at $70 a barrel for drilling to switch back to natural gas,” Salil Sharma, vice president and portfolio manager at Loomis, Sayles in Boston, said in an April 28 phone interview. “The industry has both the resources and the ability to fill the storage deficit. It’s just a question of at what price.”
Natural gas for June slipped 1.6 cents to settle at $4.815 per million Btu today on the New York Mercantile Exchange. Futures have gained 14 percent in 2014 and are trading at the highest level for this time of year since 2008. Prices surged to $6.493 on Feb. 24, the highest intraday price since Dec. 2, 2008.
Crude has gained 1.3 percent this year and settled at $99.74 a barrel today in New York. It doubled in the past five years, compared with an increase of 43 percent for natural gas. On an energy-equivalent basis, oil trades at almost four times the price of gas, according to data from the U.S. Environmental Protection Agency and Nymex.
Arctic weather stoked demand for gas to heat homes and businesses in the Northeast and Midwest this past winter, whittling inventories down to 822 billion cubic feet in the seven days ended March 28, the least since 2003, according to the Energy Information Administration, the Energy Department’s statistical arm. Supplies were a record 55 percent below the five-year average for that week.
Commodity Weather Group LLC in Bethesda, Maryland, said December through February was the coldest for that period in the lower 48 states since the winter of 1981-1982, based on energy-weighted heating degree days, a measure of weather-driven demand. Gas consumption in January was the highest on record at 104 billion cubic feet a day, according to the EIA. About 49 percent of U.S. households use gas for heating.
Stockpiles may rise to 3.422 trillion cubic feet by late October, 11 percent below last year’s total for the period, before cool weather sparks use for heating, EIA forecasts show. To reach that level, storage must be replenished at a record pace, with almost 2.6 trillion added in the next six months.
Narrowing the supply gap won’t be easy, even as government estimates show gas production climbing 3 percent to an all-time high of 72.29 billion cubic feet a day this year, a fourth consecutive annual record.
Producers show no signs of scaling back oil drilling in favor of gas, Michael Hsueh, a strategist at Deutsche Bank in London, said in an April 4 phone interview. They are locking in prices for future production to offset possible losses if futures decline.
“Oil and gas producers haven’t actually made any changes to 2014 drilling plans,” Hsueh said. “What they’ve done is raise the amount of gas output that is hedged against lower prices, but that doesn’t mean production plans have increased. We remain bullish on the 12-month gas strip.”
The numbers of rigs drilling for gas in the U.S. has tumbled 80 percent from an all-time high of 1,606 in 2008, to a 21-year low, data from Baker Hughes Inc. in Houston show. Oil rigs have more than tripled, rising to a record 1,534 in the week ended April 25.
The oil and gas markets are far from “return parity,” which occurs when gains from drilling oil match profits for gas, Jeffrey Currie, global head of commodities research for Goldman Sachs in New York, said in an April 13 note to clients. “Relatively weak” gas prices have limited output from so-called dry gas formations, which produce little oil or associated liquids, Currie said.
Chesapeake said oil production adjusted for asset sales may increase 8 to 12 percent this year, compared with 4 to 6 percent for gas. The company boosted average daily oil production 32 percent in 2013 while gas output dropped 3 percent.
Devon Energy Corp. said it will invest about $1.1 billion in the oil-rich Eagle Ford formation in south Texas this year, drilling more than 200 wells, after spending $6 billion to buy 82,000 net acres of leases in the basin from closely held GeoSouthern Energy Corp. Only about $600 million of the company’s estimated $5.4 billion capital budget this year will go toward gas production in liquids-rich areas of the Barnett Shale in Texas and Anadarko Basin in Oklahoma, the company said in an April 8 investor presentation.
Encana Corp., which is also seeking to increase investor returns by shifting to oil, said yesterday that it would sell natural gas-producing properties in east Texas to an undisclosed buyer for about $530 million. Spokesmen for Chesapeake and Devon declined to comment. An Encana spokesman didn’t respond to a request for comment.
Scott Hanold, an analyst at Royal Bank of Canada in Minneapolis, and Francisco Blanch, global head of commodity research at Bank of America Corp. in New York, said a sustained gas price between $4.50 and $5 is needed to increase drilling in formations that produce mostly gas without associated liquids. Hanold was among the top five gas price forecasters ranked by Bloomberg for the quarter ended March 31.
“Gas looks a lot better than it did, but oil looks even better at $100,” Hanold said in an April 22 phone interview. “Operators are getting pretty strong returns in most of the major oil plays. Without a sustained gas price at $4.50 or higher, producers don’t have enough confidence to put gas rigs back to work.”