Natural Gas Could Have Limited Upside in 2017

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Part 2
Natural Gas Could Have Limited Upside in 2017 PART 2 OF 5

OPEC Could Be a Bearish Catalyst for Natural Gas Prices

Natural gas rigs

On March 10, 2017, the natural gas (UNG) (GASX) (FCG) (GASL) rig count was 151—a rise of five rigs in the week ending March 10. The number of active natural gas rigs has risen by 57 in the past year. On March 17, 2017, Baker Hughes (BHI) will release its natural gas rig count for the week ending March 17, 2017.

OPEC Could Be a Bearish Catalyst for Natural Gas Prices

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The natural gas rig count for the week ending March 10, 2017, was 90.6% lower than its peak in 2008. The rig count reached a historic high of 1,606 in 2008. Despite the sharp fall in natural gas targeted rigs since August 2008, natural gas production continued to rise.

Crude oil rigs and natural gas production

The oil rig count, not just the natural gas rig count, is an important factor to watch to understand what’s driving natural gas prices. It could be a major bearish catalyst for natural gas. Over the past ten years, natural gas production has moved more in tandem with the crude oil rig count than with the natural gas rig count, as you can see in the above chart.

Apart from natural gas–targeted wells, natural gas is also often an associated product of crude oil (USO) (OIIL) (UWTI) (USL) extraction.

Rising crude oil prices after the 2008 financial crisis kept the number of oil rigs rising until June 2014. With increasing crude oil extraction, associated natural gas production also kept rising despite falling prices.

Since June 3, 2016, crude oil rigs have risen by 292 as of the week ending March 10, 2017—a rise of 95.3% from the bottom. On March 10, the US crude oil rig count was 617—eight more than the previous week.

Moreover, relatively strong WTI crude oil prices due to OPEC’s supply cuts until June 2017 could lead to higher US oil supplies. It could cause a rise in associated natural gas production as well. It would be bearish for the commodity.

In the short term, any fall in natural gas prices could have limited impact on natural gas–weighted stocks, the energy sector, and broader market indices such as the S&P 500 index (SPY) (SPX-INDEX) and the Dow Jones Industrial Average (DIA) (DJIA-INDEX).

Rig efficiency

Increasing rig efficiency also helped US natural gas companies produce more natural gas with fewer rigs. The EIA estimates that new-well gas production per rig will be 3,516 thousand cubic feet per day in April 2017—about 30.7% more than in April 2016. So, rising rigs could increase US natural gas supplies more today than the same number of rigs would have in the past, which is also a bearish driver for natural gas prices.

Natural gas prices and ETFs

If the number of oil and gas rigs keeps rising, it could boost natural gas production and pressure prices. Given the impact on production and energy prices, rig counts impact ETFs such as the ProShares Ultra Oil & Gas (DIG), the PowerShares DWA Energy Momentum ETF (PXI), the Vanguard Energy ETF (VDE), the Energy Select Sector SPDR ETF (XLE), the iShares US Energy (IYE), and the Fidelity MSCI Energy ETF (FENY).

In the next part of this series, we’ll take a look at natural gas inventories.


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