Stable gas prices to bolster U.S. drilling

CIT Group Forecast Factors [13,669 bytes] Steady increases in the production and consumption of natural gas in the U.S. will help offset the losses caused by recent low oil prices and support a slight increase in drilling activity next year. This is the conclusion of a report by the CIT Group, Livingston, N.J., which characterizes the outlook for oil field service firms as "cautiously optimistic." Overall drilling is expected to pull back slightly in 1998 and rebound in 1999, according to a

May 4, 1998

3 min read

CIT Group Forecast Factors [13,669 bytes]

Steady increases in the production and consumption of natural gas in the U.S. will help offset the losses caused by recent low oil prices and support a slight increase in drilling activity next year.

This is the conclusion of a report by the CIT Group, Livingston, N.J., which characterizes the outlook for oil field service firms as "cautiously optimistic."

Overall drilling is expected to pull back slightly in 1998 and rebound in 1999, according to a 2-year industry forecast prepared by CIT Group.

The firm says that, for all of 1998, the average active rig count should fall to 875-900, compared with an average total rig count in 1997 of 943 rigs. The count will increase again in 1999 to 900-925 rigs.

"From all indications, the industry has finally begun to recover from the protracted decline that began in 1982," said, Mike Paslawskyj, CIT Group vice-president for economic development. "One of the biggest challenges that remains is wellhead prices for hydrocarbons."

Prices, rig counts

U.S. natural gas demand will continue along its upward trajectory, predicts CIT, helping keep gas prices comfortably above the point at which some projects become unprofitable. U.S. demand for natural gas has increased about 2.8%/year since hitting a low in 1986.

Driven by the return to normal winter weather, and by the fact that some utilities have increased their use of natural gas in anticipation of more stringent sulfur dioxide limitations, consumption and production are expected to continue rising through the end of 1999. As a result, gas rig counts should remain at or slightly above last year's 564 average level.

"We expect that gas wellhead prices will remain reasonably firm during the outlook period, ranging between $1.85 and $2.15/Mcf," Paslawskyj said. "Because it's economically infeasible to import natural gas, the domestic gas industry is insulated from the outside influences that can hurt oil prices."

According to the report, the summer driving season and the return of normal winter weather patterns will push oil prices up from $13/bbl in the first quarter to about $14.50/bbl during the next 2 years. Overproduction by Organization of Petroleum Exporting Countries and the ongoing problems with the Asian economy, however, will have a dampening effect on oil prices.

Prices this low do not normally bode well for the industry. Oil drilling rig counts are expected to fall to the low 300s level in the next 2 years from the 376 average that prevailed in 1997.