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Oil Rigs: How They Could Accelerate Natural Gas’s Fall

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Natural gas rig count

The natural gas rig count rose by six to 192 in the week ended July 28, 2017.  However, since the same period in 2016, the natural gas rig count has more than doubled. On a year-over-year basis, natural gas active futures rose just 2.9%. Rising rigs despite only a small gain in prices don’t bode well for natural gas prices because rising rigs would mean more supply in a market already struggling with ample supply. We’ll look at natural gas inventories in the next part of this series.

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Oil rigs

Since record levels in 2008, the natural gas rig count has fallen 88.0%. But natural gas production rose constantly despite the huge fall in the natural gas rig count between 2008 and 2017. The revolution in the US shale oil industry since 2007 could explain it. Natural gas is often an associated product of oil production. Therefore, natural gas production followed the upsurge in US shale oil production, which was favored by higher oil (USO) (USL) prices.

Last week, the oil rig count rose by two to 766. The possible cut in oil exports by Saudia Arabia is another important factor that could encourage US oil producers to add more oil rigs. So natural gas prices could see headwinds ahead. Apart from the rising oil and natural gas rig count, new-well gas production per rig could rise 26.5% in August 2017 compared to August 2016.

Additional production due to rising oil and gas rigs, combined with increasing per-gig production efficiency, could mean more natural gas coming on the market. That would be bearish for prices that are already weak. Revenues for US natural gas producers (XLE) (XOP) such as Southwestern Energy (SWN) and Antero Resources (AR) could be negatively impacted by any fall in natural gas prices.

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