Forecasting energy prices is
always a tricky business, given the many variables at play. But sometimes a data point flashes like a neon sign that says: Watch what this means for your electricity bills.
Such is the case today with drilling ‘rig counts’ – the number of rigs used to actively explore for natural gas. This year, rig counts dropped to an all-time low in the United States, according to data collected since 1940.
Fewer Rigs = Less Production
In simplest economic terms, fewer rigs means less production. Less production means lower gas supplies and therefore upward pressure on natural gas prices. Natural gas is used to produce about one-third of US electricity. So what power plants pay for natural gas influences your electricity bills.
"Natural gas is used to produce about one-third of US electricity."
Exactly how low are rig counts? One year ago the U.S. had 219 natural gas rigs operating. As of July 1 the number fell to 89 rigs, according to the Baker Hughes Rig Count. That’s a stomach turning 60 percent drop.
Analysts point to a few reasons for the decline in rigs. On the plus side, drilling technologies are now more efficient, so fewer rigs are needed to produce more natural gas.
But at the same time natural gas prices are and have been depressed, which in turn means lower revenue for natural gas producers and less cash available to invest in further exploration and production. Hence we see lower rig counts.
“They can't drill because there is no money to do it,” says the Superinvestor Bulletin, adding, “We can't look at these numbers and not conclude that natural gas prices can do anything but go up in the short and medium term.”
So what does that mean for my electricity contract?
The good news is that right now natural gas inventories are still high and prices remain relatively low, below $3/MMBtu for natural gas futures.
So we may be witnessing a sweet spot. If your power contract expires in the next 12-24 months, or if you are operating on a floating index contract, it’s a great time to review your position and plan for a potential bull market.