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Will Oil Rigs Accelerate Natural Gas’s Fall?

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Nov. 20 2020, Updated 12:40 p.m. ET

Natural gas rig count

In the week ended June 30, 2017, the natural gas rig count rose by just one to 184. However, on a year-over-year (or YoY) basis, the natural gas rig count has more than doubled.

Compared to June 2016, natural gas prices rose by an average of 14.1% in June 2017. So, the natural gas rig count has doubled with less than a 20% rise in prices over the past year, a fact that could increase supply glut fears.

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Natural gas production versus oil rig count

As of the week ended June 30, 2017, the natural gas rig count had fallen ~88.5% from its historic high of September 2008. However, rising natural gas supply has been behind the downturn in natural gas prices since 2008. The rise in the oil rig count has pushed natural gas supplies higher. Usually, natural gas is a byproduct of crude oil extraction.

In the week ended June 30, 2017, the US oil rig count fell by two to 756. However, the small fall in the oil rig count may not support natural gas (GASL) prices. The oil rig count rose for 23 consecutive weeks leading up to June 23, 2017.

The US oil rig count has more than doubled since its low of 316 in the week ended May 27, 2016. OPEC’s (Organization of the Petroleum Exporting Countries) production cut deal has helped support oil prices in the last seven months.

To add to the bearishness, new-well gas production per rig could rise 19.7% in July 2017 on a YoY basis based on the EIA’s (U.S. Energy Information Administration) Drilling Productivity Report.

The above-mentioned bearish factors could be of concern for energy ETFs such as the Fidelity MSCI Energy ETF (FENY) and the Energy Select Sector SPDR ETF (XLE).

Natural gas prices and the equity market

Natural gas–weighted stocks haven’t been very affected by natural gas prices lately. However, equity indexes with some energy exposure such as the S&P 500 Index (SPY) and the Dow Jones Industrial Average (DIA) may not be completely immune to movements in natural gas prices in the long term. Natural gas–producing energy companies’ profits will be driven by realized natural gas prices.

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