Oil Rigs Could Boost Natural Gas Short Bets This Winter



Natural gas rigs

On December 16, 2016, the natural gas (UNG) (FCG) (GASL) (BOIL) rig count was 126. It was 125 in the previous week. The number of active natural gas rigs fell by 42 over the past year. A year ago, there were 168 natural gas rigs.

The natural gas rig count for the week ending December 9, 2016, was 92.2% lower than its peak in 2008. The rig count reached a historic high of 1,606 in 2008. On December 23, 2016, Baker Hughes (BHI) will release its natural gas rig count for the week ending December 23, 2016.

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Crude oil rigs and natural gas production

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. 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.

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.

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 helped US natural gas companies produce more natural gas with fewer rigs.

Since June 3, 2016, crude oil rigs have risen by 185 as of the week ending December 16, 2016—a rise of 61.4% from the bottom. On December 16, the US crude oil rig count was 510—12 more than the previous week.

Natural gas prices and ETFs

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 (DIG), the PowerShares DWA Energy Momentum ETF (PXI), the Vanguard Energy ETF (VDE), the iShares US Energy (IYE), and the Fidelity MSCI Energy ETF (FENY).

In the next part of this series, we’ll take a look at natural gas inventories.


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