US natural gas rigs
In the previous week’s report, natural gas rigs fell by one to 188 on January 19–26, 2018. US natural gas rigs were near the highest level since September 2017. US natural gas rigs have also risen 30% from a year ago. Crude oil and natural gas rigs increased as WTI crude oil traded near multi-month highs. The Energy Select Sector SPDR ETF (XLE) benefit from higher oil prices. XLE has exposure to energy companies.
Natural gas prices
US natural gas prices averaged $2.55 per MMBtu and $2.99 per MMBtu in 2016 and 2017. WTI crude oil prices rose ~12.4% in 2017.
US energy companies increased their capital spending in 2017 due to higher oil and gas prices, which led to the rise in drilling activity. Higher oil and gas prices benefit drillers like Transocean (RIG), Halliburton (HAL), Diamond Offshore (DO), and Schlumberger (SLB).
OPEC’s production cuts
OPEC and Russia agreed to production cuts from January 2017 to December 2018. On January 21, 2018, Saudi Arabia signaled the extension of the production cuts in 2019. Brent oil prices have risen more than 50% since June 2017 partly due to the production cuts.
Higher compliance with production cuts and another output cut extension could support oil prices. Higher compliance could increase US energy companies’ capital expenditure and spur US drilling and production.
Crude oil prices
The US natural gas rig count was near a four-month high. Natural gas is generally an associated product of crude oil. Higher oil prices would increase US oil rigs, which would increase US natural gas production. Higher US natural gas production would pressure natural gas prices.
Next, we’ll discuss US natural gas supply.