The natural gas forward curve shows a steep contango, with delivery costs expected to rise significantly in the near future.
In January 2024, Henry Hub natural gas delivery prices are expected to rise above $3.50 / MMBtu. Producers consider $3.50 / MMBtu to be a ‘magic level,’ with prices above triggering significant activity growth: more frack crews swelling well-level completion figures and more rigs increasing DUC inventories, capable of being quickly completed at a later date. Although prices are expected to return to sub $3.50 levels in the summer of 2024, with the calendar year strip coming in at $3.40, this remains an attractive price for producers considering increasing frac crew and rig activity. This explains expectations for producers to announce increased frac crew and rig activity in their earning calls, beginning in the 4th quarter of 2023.
Oil Prices
Increased future producer activity is expected in the oil-dominant Permian, Eagle Ford, and Bakken basins, with WTI crude oil prices for the front two delivery months sitting at over $90/Bbl. Despite the forward curve for WTI crude oil being backwardated (with lower prices for future delivery dates), oil prices are expected to remain over $80/Bbl until the November 2024 WTI futures contract.
According to many producers, crude oil’s magic price, above which producers increase frac crew and rig numbers, is $80/Bbl, explaining why the rig count, as measured by SynMax, has risen steadily since the end of August 2023.
The Baker Hughes rig count for the Lower 48 US is expected to increase throughout the next month as it realigns with SynMax.
Oil & Natural Gas Price Correlations to Rigs & Frac Crews
The industry is aware of the positive correlation between oil and natural gas prices and rig and frac crew numbers. When predicting the number of frac crews and rigs using natural gas and oil pricing, the first hurdle is ascertaining which time lag to use. The table below analyses the correlation between rig and frac crew numbers and natural gas and oil prices using set time lags. Rig and frac crew data is provided by SynMax. Price data uses the rolling front-month futures contract. The sample period is from January 1, 2022, through September 15, 2023.
This data shows that a three-month time lag is the best for predicting rig and frac crew numbers. When predicting frac crew numbers using crude oil prices, the three-month lag again seems to be the best option, though this changes to six months when predicting rig numbers.
Summary
Late August and early September saw rig and frac crew numbers in the Lower 48 US bottom out. We expect both to rise significantly; oil prices are expected to remain well above $80/Bbl, and the steep natural gas price contango is expected to bring $3.50 / MMBtu throughout the winter months. A three-month time lag worked best when predicting rig and frac crew numbers based on natural gas prices in 2022-23. A three to six-month time lag was optimal when predicting rig and frac crew numbers using crude oil prices in 2022-23.