11 May

Natural Gas: Oil Rigs Could Undo Gains

WRITTEN BY Rabindra Samanta

Natural gas rigs

On May 5, 2017, the natural gas (BOIL) (GASX) (FCG) (GASL) rig count was 173—a rise of two rigs over the previous week. The number of active natural gas rigs has risen by 87 in the past year.

Natural Gas: Oil Rigs Could Undo Gains

On May 12, 2017, Baker Hughes (BHI) will release its natural gas rig count for the week ending May 12, 2017.

The natural gas rig count for the week ending May 5, 2017, was 89.2% lower than its peak in 2008. The rig count reached a historic high of 1,606 in 2008. Despite the sharp fall in natural gas rigs since August 2008, natural gas production continued to rise in the following years.

Crude oil rigs and natural gas production

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. Apart from natural gas wells, natural gas is often an associated product of crude oil extraction. Rising crude oil prices after the 2008 financial 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.

After hitting a bottom of 316 oil rigs in the week ending May 27, 2016, the oil rig count more than doubled to 703 on May 5, 2017. According to the latest report on May 5, the US crude oil rig count rose by six from the previous week.

Relatively strong WTI crude oil prices due to OPEC’s (Organization of the Petroleum Exporting Countries) supply cuts could lead to higher US oil supplies. It could also cause a rise in associated natural gas production, which would be bearish for the commodity this summer.

Natural gas’s impact on stocks and ETFs

In the short term, any fall in natural gas prices could have a limited impact on natural gas stocks and broader market indexes such as the S&P 500 Index (SPY) (SPX-INDEX) and the Dow Jones Industrial Average (DIA) (DJIA-INDEX). In the long term, the impact could be more material.

If the number of oil 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 Fidelity MSCI Energy ETF (FENY), and the Energy Select Sector SPDR ETF (XLE), among others.

Rig efficiency

Increasing rig efficiency also helps US natural gas companies produce more natural gas with the same number of rigs. The EIA estimates that new well gas production per rig will be 3,568 thousand cubic feet per day in May 2017—about 25.8% more than in May 2016. So, the same number of rigs could increase US natural gas supplies more today than they would have in the past—a bearish driver for natural gas prices.

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