Rising Rigs: The Natural Gas Bear’s Best Friend
Natural gas rig count
In the week ended July 7, 2017, the natural gas rig count gained five and went to 189. Compared to the same period in 2016, the natural gas rig count has more than doubled. That’s a bearish factor that could cap gains in natural gas prices. Natural gas prices have risen just 9.2% in the past year.
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Oil rig count’s influence on natural gas production
The latest natural gas rig count level was 88.2% below its historic high in 2008. Despite such a large fall in the rig count, natural gas supplies rose significantly. The rise in the US oil rig count could explain it because natural gas is an associated product during oil extraction.
In the week ended July 7, 2017, the US oil rig count was 763. More importantly, in the trailing year, the US oil rig count has more than doubled as oil prices have been stronger since OPEC’s (Organization of the Petroleum Exporting Countries) production cut deal.
A more than 100% surge in natural gas and the oil rig count could increase natural gas supplies substantially. In 2017, natural gas consumption could fall, as we saw in Part 1 of this series. So gains in natural gas prices could be limited in 2017.
Rising rig counts and rig efficiency could negatively impact natural gas prices. Based on the EIA’s Drilling Productivity Report, on a year-over-year basis in July 2017, new well gas production per rig could see an increase of 19.7%.
Can natural gas impact the broader market?
In the short run, natural gas–weighted stocks have been less impacted by natural gas (BOIL) prices. So the interaction of energy constituents of equity indexes such as the S&P 500 Index (SPY-INDEX) and the Dow Jones Industrial Average (DIA-INDEX) with natural gas could be less. But in the long run, natural gas could influence these equity indexes because natural gas prices will finally drive the profits of their natural gas–producing constituents.