Asymmetric Effects of Prices and Storage on Rig Counts: Evidence from the US Natural Gas and Crude Oil Markets

Abstract

This study empirically investigates the asymmetric effects of spot (future) prices and storage on rig counts in the US natural gas and crude oil markets from January 1986 to May 2020. It adopts the Nonlinear Autoregressive Distributed Lag (NARDL) model and establishes a flexible and efficient framework that measures the effects of positive and negative shocks in each of these variables on rig counts while modeling possible asymmetries in both the short and long term. For the natural gas market, the results reveal significant long-term asymmetric effects of spot (future) gas prices and storage on gas rigs. The positive and statistically significant cumulative effect of changes in natural gas storage suggests that larger natural gas storage has caused changes in the use of natural gas drilling rigs. For the crude oil market, we find significant short-term asymmetric effects of spot (future) gas prices and oil stocks on oil rigs. Furthermore, in addition to the optimal price and level of storage, the cost, as proxied by the interest rate, is a crucial determinant in rig drilling decision-making in the energy sector.