After a very warm winter in 2011, natural gas inventories accumulated to levels much higher than the 5 year average norms. The resulting impact was a desire to move drilling rigs away from natural gas producing regions such as the Haynesville into oil producing regions such as the Eagle Ford. Combine the rapid reduction in drilling rigs with the extremely hot summer and natural gas inventories are now approaching normal levels.
In fact the, EIA reported only a 72bcf increase to the inventories for the last week. Typically the number for the first week of October tops 100bcf. See chart below:
While the above chart from the EIA doesn't show the daily production and useage totals, it does clearly highlight how the excesses from last winter have been worked off. On top of that, a vast majority of rigs have been moved out of the gas regions suggesting production declines could start hitting the market.
These rigs are now being used in the oil producing regions where $90+ oil provides more attractive economics. The desire to move rigs back will be extremely limited until much higher nat gas prices exist. Would even prices in the $5 to $6 range encourage a company to undertake the expensive cost of moving a rig and support crews?
The interesting part for the oil services companies will be what happens to demand when both oil and nat gas regions are booming at the same time. While demand has remained high, the market might finally enter the area where pressure exists for both sectors.
Our picks remain C&J Energy Services (CJES), Heckmann (HEK), and Weatherford Int'l (WFT).
Disclosure: Long CJES, HEK, and WFT. Please review the disclaimer page for more details.