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Oil Rig Count Could Create Turbulence in Natural Gas Prices

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Natural gas rigs

On January 6, 2017, the natural gas (UNG) (FCG) (GASL) (BOIL) rig count was 135. It was 132 in the previous week. The number of active natural gas rigs fell by 16 over the past year. A year ago, there were 148 natural gas rigs.

The natural gas rig count for the week ending January 6, 2017, was 90.8% lower than its peak in 2008. The rig count reached a historic high of 1,606 in 2008. On January 13, 2017, Baker Hughes (BHI) will release its natural gas rig count for the week ending January 13, 2017.

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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. The relationship is seen in the above chart.

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, 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.

Since June 3, 2016, crude oil rigs have risen by 204 as of the week ending January 6, 2017—a rise of 67.4% from the bottom. On January 6, the US crude oil rig count was 529—four 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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