uploads///Crude Oil Rigs Led To Higher Natural Gas Production

How Did Oil Rigs Interact with Natural Gas?


May. 19 2016, Published 7:16 a.m. ET

Natural gas and rig counts

On May 13, 2016, the natural gas (GASL) (BOIL) (DGAZ) (UGAZ) rig count was 87—one more than the previous week. The number of active gas rigs has fallen by 136 over the last year. The number of active natural gas rigs was 223 a year ago. The rise in the number of active rigs could pressure natural gas prices. The natural gas rig count for the week ending May 6, 2016, was 95% lower than its peak in December 2008. In December 2008, the natural gas rig count was at historic highs of 1,606.

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Crude oil rigs boosted natural gas production

On May 13, the US crude oil (USO) (OIIL) rig count was 318—ten less than the previous week. The number of active oil rigs has fallen by 342 over the past year. Over the last ten years, natural gas production moved closer to the crude oil rig count than the natural gas rig count.

Despite the fall in the number of natural gas rigs since August 2008, natural gas production continued to rise. This can be explained by the fact that natural gas is an associated product of crude oil extraction.

Rising crude oil prices after the subprime crisis kept the number of oil rigs rising until June 2014. With increasing crude oil extraction, natural gas production also kept rising. Increasing rig efficiency also helped US natural gas companies produce more natural gas with fewer rigs.

The above graph shows how crude oil rig counts have driven natural gas production. This helped suppress natural gas prices despite the drop in active natural gas rigs. So, the oil rig count is also an important factor for natural gas–weighted stocks such as Comstock Resources (CRK),WPX Energy (WPX), Southwestern Energy (SWN), EXCO Resources (XCO), Ultra Petroleum (UPL), and Antero Resources (AR).


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