Natural gas producers depend each year on a fourth-quarter rise in demand because of cold winter weather in the Midwest and Northeast. After suffering a painful downturn in operations this year—with 1,154 rigs oil and gas rigs offline since last year as of Nov. 6—natural gas players throughout the supply chain need some good news this holiday season. Sadly, warm winds from a particularly strong El Niño may just add to more downward pressure on the rig count as 2015 comes to a dismal close.
What is El Niño?
Spanish for “the Child,” El Niño is a part of an oscillating cycle of weather patterns where warm waters in the central and east Pacific Ocean can have a profound effect on the average temperature and precipitation in the Western Hemisphere. Often, the band of warm air curves down into Central and South America. This leads to cold, wet winters in North America, particularly the Northeast, where natural gas and other heating fuel suppliers see commodity-pricing rise. However, the curve has shifted north in past El Niño events, leading to warmer, drier temperatures in the north. The National Weather Service (NWS) offers models that predict such an event may occur this winter, predicting above-average temperatures continuing—with 95 percent certainty—rough winter 2015.
What does this mean for natural gas?
Lower temperatures mean less demand for heating fuels, such as natural gas, in regions of the U.S. that typically consume them the most this time of year. The U.S. Energy Information Agency reports that nearly half of all American households heat with natural. Because of El Niño, the agency predicts a 10 percent decrease in natural gas expenses and 6 percent decline in residential natural gas consumption from the previous winter.
Can't natural gas prices survive a slip dip in demand? It’s just weather.
Traders would disagree. As NWS officials have updated their winter weather predictions, the NYMEX benchmark for natural gas pricing at the Henry Hub weakened significantly throughout the month of October—eventually trading briefly below $2 per million British thermal units late in the month, the lowest price since 2012. Pricing still remains depressed between $2 and $2.50 per mBTU, and futures confidence is shaky.
So where does this come back to rig counts?
The natural gas rig count has, since March, been at its lowest levels in North America since Baker Hughes started recording the data in 1987. The count hit its lowest at 189 rigs the week of Oct. 9—right as El Niño predictions began to surface. Since then, the natural gas rig count has struggled to get back above 200. If pricing weakens on the back of tepid demand from warmer weather, struggling operators may need to cut rigs in operation even further.
How does this matter to the pumps market?
Rig count is the lifeblood of companies that supply oil and gas fields—drilling, pumping, completion, everything. In addition, most oilfield suppliers are anxious for energy majors to set capital budgets for 2016 soon—right as El Niño takes effect on short-term futures. A slip in demand during a traditionally active season occurs right as the same struggling companies are deciding how many rigs to drill or complete for the next year? That sounds a lot like the calm before the storm—a calm that will take the form of customers not putting in orders and not returning calls. No one can be certain of the weather, but better to understand the risk.