State Dependence in the Natural Gas and Rig Count Relationship

18 Pages Posted: 25 Dec 2013 Last revised: 1 Jan 2014

Date Written: December 10, 2013

Abstract

The goal of this analysis is to understand the relationship between natural gas prices and the North American natural gas rig count. Prior research has generally not included changes in the rig count as a determinant of contemporaneous or future changes in natural gas prices. We first show that when not allowing state dependence, then the rig count does not affect natural gas prices. We then show, when allowing state dependence in the natural gas and rig count relationship, changes in the rig count are an important determinant of future changes in gas prices when natural gas prices are high. That is, over our monthly sample from 1997 through 2013, we find that the rig count has a negative and significant relationship with future natural gas price changes (Granger-causes) when natural gas prices are above a $6.74/MMBtu threshold. However, when gas prices are below this threshold, then the rig count does not affect natural gas prices (though gas prices do affect the rig count). Moreover, we find evidence consistent with media reports that natural gas producers tend to 'kill any rally' in gas prices by markedly increasing gas production.

Suggested Citation

Brigida, Matthew, State Dependence in the Natural Gas and Rig Count Relationship (December 10, 2013). USAEE Working Paper No. 13-155. Available at SSRN: https://ssrn.com/abstract=2371753 or http://dx.doi.org/10.2139/ssrn.2371753

Matthew Brigida (Contact Author)

SUNY Polytechnic Institute ( email )

United States

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