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Decoding the Crude Oil Rig Count’s Impact on Natural Gas Prices

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Natural gas rigs

On July 29, 2016, the natural gas (UNG) (FCG) (BOIL) (GASL) (GASX) (UGAZ) (DGAZ) rig count was 86, which represents a fall of 2 rigs compared to the previous week. The number of active natural gas rigs has fallen by 123 over the past year. A year ago, there were 209 natural gas rigs. Notably, the natural gas rig count for the week ending July 29, 2016, was 94.6% lower than its peak in 2008. The rig count reached a historic high of 1,606 in 2008.

The natural gas rig count for the week ending August 5 will be released by Baker Hughes (BHI) today.

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Crude oil rigs and natural gas production

On July 29, the US crude oil rig count was 374, which was 3 higher than in the previous week. 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 (USO) (OIIL) (UWTI) (USL) extraction. 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.

Rising crude oil prices after the subprime mortgage 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.

Natural gas prices and stocks

This trend helped boost natural gas production and suppress natural gas prices (UNG) (FCG) (BOIL) (GASL) (GASX) (UGAZ) (DGAZ), despite a fall in the number of active natural gas rigs. In this way, the crude oil rig count is an important factor for natural gas–weighted stocks such as Comstock Resources (CRK), WPX Energy (WPX), Southwestern Energy (SWN), Gulfport Energy (GPOR), EXCO Resources (XCO), Rex Energy (REXX), and Antero Resources (AR).

Given the impact on production and energy prices, the rig count impacts ETFs such as the ProShares Ultra Oil & Gas ETF (DIG), the PowerShares DWA Energy Momentum Portfolio (PXI), the Vanguard Energy ETF (VDE), the iShares U.S. Energy ETF (IYE), and the Fidelity MSCI Energy Index ETF (FENY).

Comstock Resources (CRK), WPX Energy (WPX), Rex Energy (REXX), Gulfport Energy (GPOR), and EXCO Resources (XCO) operate with a production mix of more than 60% in natural gas.

In the next part of this series, we’ll discuss natural gas inventories.

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