Rigs Rise: Could It Pressure Natural Gas Prices?



Natural gas rigs

On October 14, 2016, the natural gas (UNG) (FCG) (BOIL) (GASL) (GASX) (UGAZ) (DGAZ) rig count was 105—11 more than the previous week. However, the number of active natural gas rigs fell by 87 over the past year. A year ago, there were 192 natural gas rigs.

The natural gas rig count for the week ending October 14 was 93.5% 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 October 21 will be released by Baker Hughes (BHI) on October 21, 2016.

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Crude oil rigs and natural gas production

On October 14, the US crude oil rig count was 432—four more than the previous week. Despite the fall in the number of natural gas rigs since August 2008, natural gas production continued to rise. Apart from natural gas–targeted wells, natural gas is also often an associated product of crude oil (USO) (OIIL) (UWTI) (USL) extraction. Over the past ten years, natural gas production 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 associated natural gas production also kept rising despite falling prices. Increasing rig efficiency also helped US natural gas companies produce more natural gas with fewer rigs.

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Rising oil rigs

So, the oil rig count—not just the natural gas rig count—will be important to watch alongside natural gas prices this week. It could be a bearish catalyst for natural gas. Between June 3 and October 14, 2016, oil rigs rose by 107—up 32.9% from the bottom.

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, rig counts impact 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.


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