Why Rising Oil Rigs Could Be Negative for Natural Gas Prices

Natural gas rigs

On September 9, 2016, the natural gas (UNG) (FCG) (BOIL) (GASL) (GASX) (UGAZ) (DGAZ) rig count was 92—four more than the previous week. The number of active natural gas rigs has fallen by 104 over the past year. One year ago, there were 196 natural gas rigs.

Why Rising Oil Rigs Could Be Negative for Natural Gas Prices

Notably, the natural gas rig count for the week ending September 9, 2016, was 94.3% 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 September 16 will be released by Baker Hughes (BHI) on September 16, 2016.

Crude oil rigs and natural gas production

On September 9, the US crude oil rig count was 414—seven more than 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, the natural gas production also kept rising. Increasing rig efficiency also helped US natural gas companies produce more natural gas with fewer rigs.

Rising oil rigs

Between June 3, 2016, and September 9, 2016, oil rigs have risen by 89—up 27.4% from the bottom. This could be a bearish catalyst for natural gas. So, the oil rig count—not just the natural gas rig count—will be an important thing to watch alongside natural gas prices this week.

Natural gas prices and ETFs

The above trend helped boost natural gas production and suppress natural gas prices despite a fall in the number of active natural gas rigs. 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, 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 US Energy ETF (IYE), and the Fidelity MSCI Energy Index ETF (FENY).

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