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Are Oil Rigs Preventing Natural Gas’s Rise?

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Natural gas rig count

The natural gas rig count was 188 in the week ended June 22. That’s six less than the previous week. That would typically be a bullish sign for natural gas prices.

However, natural gas active futures have fallen 62.6% since January 2008, even as the natural gas rig count has fallen 88.3% from a record level of 1,606 in 2008. That’s because US natural gas marketed production rose 50.3% between January 2008 and March 2018, despite the steep fall in natural gas–targeted rigs.

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What’s behind the sharp rise in natural gas supplies?

Rising oil production in the United States is behind the rise in natural gas supplies, despite the drop in natural gas–targeted rigs. Natural gas is often a by-product of US shale oil production. So the rising oil rig count is an important thing to watch in order to understand natural gas supplies. The relationship can be seen in the above chart.

Crude oil rig count

Between January 4, 2008, and June 22, 2018, the oil rig count more than doubled. In fact, based on the relationship between oil prices and the oil rig count, the oil rig count might keep rising at least until October. That’s a factor that could boost supplies of both crude oil and natural gas and obstruct the upside in natural gas prices. In the week ended June 22, the oil rig count fell by one to 862, which is near its three-year high.

Based on the EIA’s (U.S. Energy Information Administration) Drilling Productivity Report released on June 18, there could be a rise of 34.1% in natural gas production in July from the major US shale regions on a year-over-year basis.

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Impact on energy stocks and energy ETFs

On our list of natural gas–weighted stocks, Chesapeake Energy (CHK) and Southwestern Energy (SWN) have fallen the most since 2008. These two stocks fell 85.2% and 81.6%, respectively, during that period. Cabot Oil & Gas (COG) rose 135.2%, the only gainer on our list since 2008.

In the trailing week, Chesapeake Energy, Cabot Oil & Gas, and Southwestern Energy’s returns were 5%, -1.8%, and 1.1%, respectively. Natural gas August futures rose 0.9% during that period.

In the past five trading days, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Energy Select Sector SPDR ETF (XLE) returns were 1.9% and -0.2%. These ETFs contain natural gas producer stocks, which could be sensitive to the higher oil rig count’s negative impact on natural gas prices.

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